Chicago and the Causes of the Great Recession

One of the main arguments we have made in our research and book is that the growth in household debt and the subsequent collapse in house prices are crucial for understanding the Great Recession and the weak recovery afterward.

To illustrate this argument in the micro-data, we focus here on Chicago.

First, here is a zip-code level map of Chicago, plotting median household income. The darker shades of green are the poorest zip codes. We have labeled a few of the zip codes just to familiarize the non-Chicago readers. The south side neighborhoods are Oakland/Bridgeport, Hyde Park (home of the University of Chicago), Washington Park, and Englewood (where Derrick Rose is from). The north side neighborhoods we’ve labeled are Lincoln Park, Lakeview, and Rogers Park. The poorest neighborhoods in Chicago are on the south and west sides, whereas the richest are just north of downtown.



We know there was a boom in mortgage credit from 2002 to 2006. Where was it strongest? In the following map, darker shades of green are where mortgage credit grew most:




Mortgage credit growth from 2002 to 2006 was strongest in the lowest income neighborhoods. This was one of the first patterns we saw in the data back in 2007 when we started working on household debt issues. It was the basis of our research published in the Quarterly Journal of Economics. The basic point was that mortgage credit was growing most during the housing boom in the poorest neighborhoods, despite the fact that these neighborhoods were seeing no improvement in income.

So what happened during the housing bust? Here are foreclosures by zip code, with darker green zip codes being the worse hit areas. Mortgage credit was expanding in poor neighborhoods despite no real income growth, so we shouldn’t be surprised that foreclosures were also much higher in those same neighborhoods:



And what about spending? We only have spending data for new autos at the zip code level. But it shows a very clear pattern. Purchases of new automobiles fell most in the the same poor zip codes that had the largest increase in mortgage debt followed by a spike in foreclosures:



This generates a very strong relationship between debt growth and the collapse in spending, as can be seen in this scatter plot. Each dot is a zip code, and it shows that zip codes that had the largest increase in mortgage debt during the housing boom were exactly the zip codes that saw the largest collapse in spending on new autos during the bust:




We have focused on Chicago just to give one example. The patterns we show here are robust across the country. It is pretty clear that the debt boom and housing collapse are central to explaining the Great Recession (we detail more of the evidence in our new book, now available on Amazon). Can other theories of the cause of the recession explain these patterns? Did neighborhoods on the south and west side of Chicago cut spending because of the collapse of Lehman Brothers? Did these areas suffer because of policy uncertainty? Because monetary policy was too tight? Perhaps these problems exacerbated the recession. But the central role of excessive debt and the housing collapse are immediately obvious in the data.


Bookmark and Share

15 Responses to Chicago and the Causes of the Great Recession

  1. anon on May 8, 2014 at 10:26 ami

    Does that mean that you think that bankruptcy cramdown should have been passed in 2008-09?

    • Atif Mian and Amir Sufi on May 8, 2014 at 10:55 ami

      Buy our book for the answer!

  2. P on May 8, 2014 at 11:05 ami

    Interesting. Surely, you don’t think of the mortgage credit growth and the housing bust as primitives in whatever model you’re operating with. So saying these two things were the “cause” of the Great Recession seems strange to me.
    What caused the mortgage credit boom and bust?

    • Paul Andrews on May 8, 2014 at 5:24 pmi

      When base money per capita is grown by the central bank there is an artificial incentive to borrow. More borrowing pushes up prices, which encourages more borrowing both to cover those prices, and to benefit from asset appreciation. A credit bubble is the result.

      The US has grown base money per capita incessantly since the mid 1960s.

      • reason on May 9, 2014 at 3:37 ami

        “The US has grown base money per capita incessantly since the mid 1960s.”

        So the US has had a credit bubble since the 1960s.

        The Austrian theory of permanent boom and permanent bust.

  3. Christine on May 8, 2014 at 12:07 pmi

    One (obvious) thing that also stands out during the Great Recession is the rise and persistence in unemployment. Considering that unemployment and mortgage credit boom and bust were two unique features of this recession, it seems natural that there should be a link between them. One thing I gather from your previous work is that the resulting fall in household spending, as a result of the housing bust, likely contributed to this rise in unemployment. Do you have any data linking foreclosures and unemployment in any way?

  4. theyenguy on May 8, 2014 at 4:53 pmi

    Could please consider posting those zip codes that had the largest increase in mortgage debt during the housing boom?

  5. Uewgfdmn on May 8, 2014 at 11:51 pmi

    Items that are very detailed forecast models, run over by the US and Japan and the Japanese begin to feel good about our Asia region., online casino play, [url=" "]online casino play[/url], neq, best online casinos usa, [url=""]best online casinos usa[/url], 4541,

  6. Kareem on May 9, 2014 at 12:52 ami

    This proves nothing and provides no new information.

    The run up in mortgage lending and securitization in the last decade was most concentrated in subprime, so there is little wonder that mortgage debt grew the most in low income neighborhoods.

    At the same time, unemployment seems to strike less educated and lower income workers the hardest.

    So a story where the financial crisis was crucial to generating the recession can easily accommodate both facts.

    The bit about foreclosures actually undercuts the debt/deleveraging story, as it indicates that subprime borrowers, who put little if any money down to begin with, have long since discharged their debts.

    • Manray on May 9, 2014 at 3:18 pmi

      “The bit about foreclosures actually undercuts the debt/deleveraging story, as it indicates that subprime borrowers, who put little if any money down to begin with, have long since discharged their debts.”

      Subprime borrowers without equity in their homes hardly “discharged their debts” by entering foreclosure during the housing crisis. Home prices plummeted while these subprime foreclosures cascaded. Imagine you bought a $150k home in 2005 with $10k down, on household income of $60k/annum. You enter foreclosure in 2007 with a mortgage balance of $130k. The bank cuts its losses and sells the home in 2009 for $90k. Meanwhile, your household income has fallen to $35k/annum (including unemployment benefits) after your spouse loses his or her job. You now owe more to your former mortgagor than you make in a year, and your housing payments go to vanishing rents.

      Ready to go out and spend? Why not? Answer: the foreclosure crisis.

  7. Richard H. Serlin on May 9, 2014 at 4:03 ami

    Ordered the book. Hoping to at least find some good statistics and other information for my personal finance students at the University of Arizona (and National Personal Finance Education). First up, though, is Chasing the American Dream, by a group of accomplished sociologists, with some Stocks for the Long Run, new edition, in between. Siegel has an interesting and detailed analysis of the financial crisis.

  8. Mark A. Sadowski on May 9, 2014 at 8:22 pmi

    What if we repeated the exercise by looking at international data involving countries with different monetary policies? Would household sector leverage growth in 2002-2006 be correlated with a decline in real household sector consumption expenditures in 2006-2009?

    The best source for such data is the OECD. Household sector leverage can be calculated as the ratio of household sector loan liabilities to household sector Gross Adjusted Disposable Income (GADI) which is equivalent to BEA Disposable Personal Income (DPI). Household Sector Final Consumption Expenditures (FCE) is equivalent to BEA Personal Consumption Expenditures (PCE). To convert it to real consumption it can be adjusted by the Household Sector FCE Deflator.

    Unfortunately this data is only available for ten OECD members with independent monetary policies. The OECD also has this data for 12 out of the 18 Euro Area members (all but Cyprus, Estonia, Latvia, Luxembourg, Malta and Slovenia), so I calculated a weighted averaged for those 12 countries for the Euro Area average.

    Here is the household sector leverage data in percent.

    1.Czech Rep-15.8–30.7–14.9
    2.Euro Area-66.1–77.9–11.8

    Here is the change in leverage with the change in real Household FCE from 2006-2009.

    1.Czech Rep-14.9—7.4
    2.Euro Area-11.8—0.9

    When one regresses the change in real Household FCE on the change in leverage ratio the R-squared value is 0.0211 meaning that only 2.1% of the variation Household real FCE change can be explained by the change in the leverage ratio. In other words there is almost zero correlation when one considers geographic regions which have differing monetary policies.

    The only countries which had above everage leverage growth in 2002-2006 combined with slower than average real consumption growth in 2006-2009 are in fact the US, the UK and Hungary. Norway and Sweden had above average leverage growth growth in 2002-2006 and above average real consumption growth in 2006-2009, and the Euro Area and Japan had below average leverage growth in 2002-2006 and below average real consumption growth in 2006-2009.

  9. Kaleberg on May 9, 2014 at 11:32 pmi

    This isn’t surprising. The financial sector found a great way to disguise bad debt and sell it as good debt. This fraud made it profitable to make stupid loans. Stupid loans did what stupid loans do. The government provided welfare for the con artists and unwise lenders, but nothing for anyone else.

    This isn’t surprising, but it’s nice to see such straightforward confirmation.

  10. Kamala on May 10, 2014 at 5:36 ami

    Over the last 14 years, well over 100,000 manufacturing jobs were lost in Cook County. Replacing manufacturing with housing, and credit and debt for real wages, was one of the main culprits of the 2008 recession.

  11. investment ideas on May 10, 2014 at 2:05 pmi

    Wow that was strange. I just wrote an really long comment but after I clicked submit my comment didn’t show up. Grrrr… well I’m not writing all that over again. Anyhow, just wanted to say excellent blog!