How High Debt From The Housing Collapse Still Stifles Our Economy Seven years after the subprime mortgage crisis, the U.S. economy has not yet fully recovered. Now two economists have come up with new evidence about what's holding the economy back.
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How High Debt From The Housing Collapse Still Stifles Our Economy

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How High Debt From The Housing Collapse Still Stifles Our Economy

How High Debt From The Housing Collapse Still Stifles Our Economy

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Six years after the subprime mortgage crisis sparked the Great Recession, the U.S. economy has yet to fully recover. Policymakers have long debated why, whether the government's response to the crisis was adequate or excessive. Now, in their new book "House Of Debt," two economists assert the real problem is that consumers remain constrained by debt they took on when times were good. And they say Washington has largely failed to address the problem. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: In the volatile months after the subprime crisis, the Bush and Obama administrations put a lot of energy into stabilizing the financial system. The idea was to keep the banks healthy so they'd lend more. In a sense, the policies worked. The banks gradually recovered, but the economy remained sluggish for a long time. To understand why, says Princeton economist Atif Mian, you have to look at debt. Household debt doubled between 2000 and 2007, and much of it was taken on by working and middle-class people whose incomes were flat or even falling.

ATIF MIAN: So you had a situation where even though people were getting poorer in terms of their real wages, they were taking on more and more debt.

ZARROLI: Mian says a big part of the problem is that so much of the debt went into mortgages and home equity loans. He says mortgages are inherently risky for borrowers. When house prices fall, the borrowers quickly lose whatever equity they've built up, but they still have to pay the bank what they owe. And he says by late 2007, prices were falling, and a lot of people were in over their heads.

MIAN: When that realization sets in, what is going to happen with the borrowers? Well, they are going to try to cut back on their spending and save.

ZARROLI: And Mian says that's what a lot of people have done. In their book, "House Of Debt," Mian and his co-author Amir Sufi, of the University of Chicago, looked at economic data in different zip codes across the country. And they've documented something that a lot of people have long suspected; debt has a corrosive effect on the economy. Atif and Mian found that in places where housing prices were flat, such as Texas and the Midwest, consumer spending has been pretty stable. But in places where housing prices fell the most, consumer spending plummeted. They're places such as Paterson, New Jersey, a faded industrial city west of New York.

JOHN SUSANI: Foreclosure. Foreclosure. Foreclosure.

ZARROLI: Real estate broker John Susani takes me down a street where every third house seems to be abandoned or boarded up. During the boom years, money flooded into Paterson.

SUSANI: The banking industry allowed everyone to be a homeowner. They gave mortgages to people that were breathing.

ZARROLI: So how much did prices go up during the boom years?

SUSANI: Oh, in some cases, as much as 50 percent. The problem is now those homes are not worth that 50 percent. We've seen a massive reduction in property values.

ZARROLI: Many Paterson homeowners were wiped out. They cut back on spending. And a lot of local businesses failed.

SUSANI: So now, if you were a local grocery store, a little mom-and-pop operation, that obviously took money from your sales for the year. And you see that in different parts of the community.

ZARROLI: And what happened in places such as Paterson has happened many times before, all over the world. Mian says periods of very high, household borrowing, such as the U.S. in the 1920s or Japan in the 1980s, have often been followed by steep downturns.

MIAN: We have seen this over and over again, where a rapid rise in private debt, household debt, is very often followed by a deep and long recession.

ZARROLI: Mian says when this happens, demand falls. And it's hard to revive it, even when the Fed lowers interest rates to the floor. "House Of Debt" argues that the Obama administration should've worked harder to help struggling homeowners pare down their debt, even if it meant forcing banks to forgive part of their loans. Former administration official Larry Summers argued in a recent op-ed that such measures would simply have never gotten through Congress, and economist Christopher Mayer of Columbia Business School agrees. But Mayer, like Summers himself, has plenty of praise for the book.

CHRISTOPHER MAYER: I think one of the things that Mian and Sufi have done really well is push us back to thinking about the role of consumers in the economy. And, you know, I think that that's a really important contribution.

ZARROLI: Until now, he says, much of our understanding of the downturn has centered on the role played by banks and the collapse of big financial houses such as Lehman Brothers. "House Of Debt" says the seeds of the downturn were planted much earlier, when consumers were encouraged to borrow so much. And the impact of that borrowing is still being felt today. Jim Zarroli. NPR News, New York.

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