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A European House of Debt

A European House of Debt

The end of 2011 and early 2012 was one of the most stressful periods in modern European history. Even the otherwise composed German chancellor Angela Merkel was brought to tears.

At issue was the very survival of European Union which had once again gone into a recession, and financial markets were seriously doubting the viability of the European integration project. Spreads on Greek, Italian, and Spanish sovereign bonds reached historic highs, and their banking sectors were faced with the real threat of bank runs.

What had brought Europe to this precarious position? Why was the unity of Europe, a remarkable political and social achievement, in serious doubt?

The answer is debt.

In the years leading up to the Great Recession, the financial markets had reposed great confidence in the so-called “peripheral” economies such as Greece and Spain. Lenders from creditor countries such as Germany and the Netherlands were willing to lend to these peripheral countries at very low spreads by historical standards.

The result was a great run up in debt inside Europe between 2002 and 2008. The figure below summarizes the net borrowing / lending position of each European country on the horizontal axis. Each country is ranked on this axis by its average current . . .

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Tim Geithner Is Wrong

We published our post over at WaPo’s WonkBlog today — one of our favorite sites. Here is the link

As a quick follow up, here is a quote from a research paper by Richard Disney and others:

“However, we do find a strong asymmetry in the response for households in “negative equity”—households in negative equity experiencing a surprise gain exhibit a consumption response five times stronger than households that had initially positive equity values in their housing stock.”

Again, the MPC estimate that Geithner uses is absurdly small, outside of the range that most economists use.

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Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t

We answer this question in our post for Fivethirtyeight.com. Here’s an extract.

In 2000, the dot-com bubble burst, destroying $6.2 trillion in household wealth over the next two years.

Five years later, the housing market crashed, and from 2007 to 2009, the value of real estate owned by U.S. households fell by nearly the same amount — $6 trillion.1

Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession. …

You can read the full post here.

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Food Stamps and Failed Economic Policies

Food Stamps and Failed Economic Policies

In the 2012 presidential campaign, Mitt Romney pointed to the rise in food stamp usage as evidence of failed economic policies. As he put it: “The numbers on food stamps are really revealing. When the president took office, 32 million people were on food stamps. And now that number is 15 million higher, almost 50% higher. Now, 47 million people on food stamps. You’ve got Americans falling into poverty under this president.”

Was Mitt Romney right? Can we blame the Obama Administration for the sharp rise in food stamp usage?

Let’s take a look. The rise in food stamp usage during and after the Great Recession is stunning. From 2006 to 2010, the number of Americans receiving food stamp support increased sharply, and it remained elevated in 2013.

Why exactly has there been such a sharp rise in food stamp usage? Is it general economic weakness? Failed economic policies? What do the data say?

The USDA provides state-level information on food stamp usage, so we can see exactly where food stamp program enrollment increased the most. Here is the growth in food stamp usage from 2006 to 2009, with darker red states those that had the largest . . .

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Buy House of Debt!

Buy House of Debt!

The book is officially available for purchase.

Here are some places to buy it online:

Amazon

University of Chicago Press

Here are some very early reviews of both the book and the blog (more are coming):

Christina D. Romer, former chair of the Council of Economic Advisers

“Mian and Sufi have produced some of the most important and compelling research on the impact of debt on consumer behavior during the recent housing bubble and bust.  This excellent new book presents and expands this research in a rigorous, yet engaging and accessible way.”

Paul Krugman

“Atif Mian and Amir Sufi, our leading experts on the macroeconomic effects of private debt, have a new blog — and it has instantly become must reading.”

Kenneth Rogoff, Harvard University

“This is a profoundly important book that makes a huge range of serious empirical evidence on the financial crisis accessible to a broad readership.  A compendium of Mian and Sufi’s own celebrated work would already be a spectacular contribution, but this book is so much more.  Although the authors present all views in a balanced, scholarly way, their quiet insistence that we should . . .

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Chicago and the Causes of the Great Recession

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 . . .

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Student Debt and a Broken Financial System

Student Debt and a Broken Financial System

When the Class of 2009 entered college in 2005, they had good reason to be optimistic. The economy appeared to be healthy, and a college degree commanded higher wages. College, of course, is expensive. And almost 2 out of 3 students entering college took on some debt. They took on that debt believing that it would be easy to pay back given the strong market for those with a college degree.

But then the biggest recession in 80 years hit the United States, leading to a much worse job market for college graduates. Here is the unemployment rate as of October for college graduates who just graduated, by year from 2007 to 2011.

The Class of 2009 had an unemployment rate of 18% — twice as bad as the Class of 2007 had when they graduated. The employment to population ratio also shows how bad the market was:

This was horrible luck for students graduating in 2009 and 2010 — in some sense they were being punished for being born 22 years earlier in 1987 or 1988. You might guess that the punishment was short-lived — eventually these students would . . .

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Henry Simons and a Debt-Free World

Henry Calvert Simons, a University of Chicago economist who wrote extensively during the 1930s and 1940s, placed significant blame on banks for the Great Depression. In particular, he despised the short-term debt contracts used in the banking industry. As he put it,

” … the economy becomes exposed to catastrophic disturbances as soon as short-term borrowing develops on a large scale … short-term obligations provide abundant money substitutes during booms, thus releasing money from cash reserves; and they precipitate hopeless efforts at liquidation during depressions …  it must be accounted one of the most unfortunate effects of modern banking that it has facilitated and encouraged the growth of short-term financing in business generally.”

He was the primary voice behind the so-called “Chicago Plan,” which was a plan to require banks to hold 100% reserves behind deposits. In other words, when you put your money in the bank, the bank can only buy assets that can be easily converted into cash if you choose to withdraw your deposit. The assets would be primarily U.S. Treasuries. In such a world, of course, deposit-taking institutions would not be able to lend your deposits out, because most loans by their nature are illiquid and . . .

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More on the GDP Mystery

More on the GDP Mystery

Our last post showed the recovery in GDP since the Great Recession has been abysmal, and we argued that it is a mystery that requires some deep thought and additional research. Let’s go a bit further into the GDP data to try to figure out what is going on.

Breaking out the GDP components is always a bit tricky because they depend on one another. For example, business investment is a function of household consumption. If business investment is weak, it could be because consumption is weak. Nonetheless, there is some useful information when we break out where the GDP weakness comes from.

Ok, now for the charts.

Let’s start with the primary culprit: consumption of services and non-durable goods. They are shockingly weak relative to other recoveries.

 

   

Consumption of durable goods is actually doing fairly well, which may reflect aggressive monetary policy that has spurred borrowing especially in the auto market:

It’s still not great, but it looks quite a bit better than consumption of services and non-durable goods.

Many point to weakness in residential investment as the primary culprit. It looks . . .

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A Chart that Demands Attention

A Chart that Demands Attention

Neil Irwin at the New York Times (The Upshot) writes that “no one cares about economic data anymore” which he says is “good news.” He points to some indisputable facts, such as the steady growth in both employment and GDP over the past few years. His focus is mostly on short-run monthly or quarterly movements in economic data–movements that perhaps we can safely ignore in the near future.

The GDP numbers for the first quarter of 2014 were released yesterday, and GDP growth was way below forecast. Bad winter weather was the likely culprit, and we agree with Irwin that we are no longer seeing the short-run gyrations in GDP numbers that we saw in the 2006 to 2010 period.

But over a longer horizon, there is something deeply puzzling about the GDP numbers, and economists everywhere should be staring at them and scratching their heads. The chart below shows why. It plots real GDP for every U.S. post-World War 2 recession for 26 quarters after the recession. Each line is indexed to 100 in the quarter before the official NBER start of the recession. The steeper the line for the particular recession, the stronger the recovery.

 

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