Streams

Debt and the Great Recession

Wednesday, June 04, 2014

In debt In debt (Copyright: PTstock/Shutterstock)

The Great American Recession resulted in the loss of eight million jobs between 2007 and 2009, and more than four million homes were lost to foreclosures. Is it a coincidence that there was a dramatic rise in household debt in the years before the recession—that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion? Definitely not, says Atif Mian. In House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, Mian and co-author Amir Sufi explain how the Great Recession and Great Depression, as well as the current economic malaise in Europe, were caused by a large run-up in household debt followed by a large drop in household spending.

Guests:

Atif Mian

Comments [14]

Syd

Here's some data the economists may have overlooked - from a CNN article in 2004:
http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/index.html

Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis."

Jun. 08 2014 04:25 PM
David

BTW, this guest is CLUELESS as to what caused the Great Depression. He's putting the cart before the horse. If Paul Krugman likes this book, you know it's a tissue of lies and misinformation.

Jun. 04 2014 04:01 PM
David

Here's an excellent book on why the Great Depression happened:

http://library.mises.org/books/Murray%20N%20Rothbard/Americas%20Great%20Depression.pdf

Jun. 04 2014 03:57 PM
Joe Mirsky from Pompton Lakes NJ

@Mick,
Transfer fee was 3$. Original interest rate was 15%-16%. The 12% difference made up for the transfer fee within a few months. I did it and it worked out great. It was a while back. Now I am debt free.

Jun. 04 2014 02:11 PM
Mick from NYC

Joe, when evaluating your scheme do you take into account that two balance transfers will incur at least 6% more debt in balance transfer fees (and possibly 8% or more) up front. Even a high interest card will be charging only about 1.5% per month, so you won't save anything in the short run. But, every credit card I've investigated charges full, new purchase interest rate on the accrued interest (that 3.99% "good" interest rate you cite). That can mean anything from 13% to over 20% interest on all the interest that accrues until you pay off that debt. So the longer you maintain the debt, the less you save on the balance transfer. The banks/credit card companies have MBA quants who can count, or at least run the computer programs that were created for them. If a person depends on balance transfers for either short or long term relief from high interest rates, that person will probably end up perpetually in debt...in other words, as a life-long indentured servant of VISA, MasterCharge, etc. The only way out is to stop borrowing and pay down the debt, smallest balance first and applying your typical payment from the card you paid off to what you are paying on the next smallest balance.

Jun. 04 2014 01:12 PM
The Truth from Becky

@Joe Mirsky, BRILLIANT! I will try this.

Jun. 04 2014 12:38 PM
Joe MIrsky from Pompton Lakes NJ

“As a very important source of strength and security, cherish public credit. One method of preserving it is, to use it as sparingly as possible; avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts, which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burthen, which we ourselves ought to bear.”
— George Washington, Farewell Address, September 17,1796.

Jun. 04 2014 12:38 PM

I am tired of hearing people who bought more house than they could pay for blamed for the collapse. Even Mike Bloomberg buys into and repeats this bogus argument.

The vast majority of sub-prime borrowers were folks who could have qualified for a standard mortgage but were using sub-prime instruments get 'cash out' loans for homes they already owned. Another large chunk were 'home flippers' who leverage a little money up-front to buy and flip homes. Lastly, a small amount (less than 20%) had incomes too low to actually cover their mortgage payments.

The sub-prime issue (which had been seen as a problem by regulators and credit as early as 2003) went from 'something we need to deal with' to a near collapse was the Bush Administration's 'non-action' over six months of $4/g gasoline. This put too many sub-prime borrowers into the 90+ day delinquent category and killed all of the financial houses whose own portfolios were too heavily invested in this bogus paper.

The US response to 'too big to fail' has been to create even bigger banking entities - despite all the stress testing, I fear it is going to happen again.

Jun. 04 2014 12:37 PM

Greenspan structured a homeowner-based economy, spurring the credit/liquidity "irrationality" and the subsequent real-estate bubble promoted by predatory banks, which had the added "perfect storm" of the deregulation and bundling of "junk" mortgages peddled by Wall St. Wonder-boys/Masters of the Universe...So Lehman takes the fall, while Goldman-Sachs, better positioned (Paulson)in the Gov't. gets bailed & thrives...and this guy doesn't want to cut the little guy "under-water" any slack?

Jun. 04 2014 12:31 PM
kerith from Brooklyn Heights

Please ask your guest how student debt relates to this discussion -

Jun. 04 2014 12:30 PM
John A

If I wanted to hear an amoral robot I could rewind my own life to age 25.
-
"Easy credit" as a "ripoff" was immortalized in the old "Good Times" themesong, if people claim there weren't any warnings.

Jun. 04 2014 12:25 PM
tom from astoria

TIANANMEN SQUARE, TIANANMEN SQUARE! Why not on your show today?!!!

Jun. 04 2014 12:19 PM
tom from astoria

How did we wind up being in debit to China? We set up those factories, we invented a majority of the technology and products produced there. Why isn't China indebted to us?

Isn't this huge for our future, and to explain recent economic history?

Jun. 04 2014 12:17 PM
Joe Mirsky from Pompton Lakes NJ

From my book, Ornamentally Incorrect, third edition, Luxe et Veritas

The Debtor Strikes Back

From time to time I report on credit card issues, how they sock it to you and me. But occasionally you can get get even. I’m in pretty good shape on my credit card interest rates, except for one bad card. I don’t use it any more. I just want to pay it off.

One day, the bad card sent me some loan checks. Usually they’re a high interest rip-off, but this time they were offering 3.99% for the life of the loan on balance transfers.

I figured out a way to stick it to them with their own offer. I paid off the balance on the bad card with a check from a good card, then paid back the good card with the bad card’s good check, lowering the interest rate from bad to good on the bad card.

If I had done it in reverse, paying the good card with the bad card, then transferring it back, it wouldn’t have worked because credit cards apply all payments to the segment of your balance with the lowest interest rate first. I would have been back at square one.

The two legs of the transaction have to be done in different billing cycles of the bad card. If you pay it down then borrow it back in the same cycle, the two transactions will cancel each other and you’ll be back where you started.

In this case, I was able to pay the bad card by the due date with the good card’s check, then pay back the good card just after the closing date of the bad card (I called them to find this out) with the bad card’s good check. For the sake of elegance, I did this in the 5 day window between the closing date of the bad card and the due date of the good card, staying in the same billing cycle of the good card, so the balance didn’t change.

I hope you took notes. There will be a test (essay). The second question will be “Who’s on first?”

Copyright © 2014 Joseph Mirsky

Jun. 04 2014 12:15 PM

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