Fast credit and hidden cost to the economy: NPR
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Before the 1980s, cash-strapped homeowners could still apply for a second mortgage. University of Chicago economist Amir Sufi said the term itself made it clear what was going on: the owner was getting more into debt.
“Now a second mortgage doesn’t sound very nice,” he says. “You know, if you already have an aversion to debt, a second mortgage is like, ‘Okay, I’m already in handcuffs, and now you’re going to put me, you know, in handcuffs on my ankles. ‘”
For most of America’s history, debt was something to be avoided. But over the past hundred years, the country’s relationship to debt has changed dramatically. Businesses, even the government, began to trick people into borrowing money, tying that borrowing and subsequent spending to a healthy economy. One way they got Americans to buy into the idea was to rebrand. In the 1980s, for example, second mortgages became known as “home equity loans”.
“There has been a systematic effort to coined this term home equity,” Sufi says. “And the idea was, well, that’s the equity in your home. You have every right to borrow against it. It’s not a bad thing to borrow against that equity.”
But in their book, House of Debt: how they (and you) caused the great recession and how can we prevent it from happening again, Sufi and co-author Atif Mian argue that the accumulation of household debt is the most important factor in severe recessions. This flies in the face of the traditional argument that the collapse of financial institutions causes recessions.
This week on Hidden brain, as the country enters another severe recession sparked by the COVID-19 pandemic, we look at the lessons we can learn from the latest recession and ask if there are ways to ensure that the most pain does not fall on those who can least afford this.
1) “The glut of savings of the rich and the increase in household indebtedness “, by Atif R. Mian, Ludwig Straub and Amir Sufi, National Bureau of Economic Research Working Paper, 2020.
2) “Avoiding Default: The Role of Credit in the 1930 Consumer Collapse”, by Martha L. Olney, The Quarterly Journal of Economics, 1999.
3) “Was the 2007 US Subprime Financial Crisis So Different? An international historical comparison ”, by Carmen M. Reinhardt and Kenneth S. Rogoff, American Economic Review, 2008.
4) “When credit comes back: leverage, economic cycles and crises” by Oscar Jorda, Moritz HP Schularick and Alan M. Taylor, National Bureau of Economic Research Working Paper, 2012.