House of Debt
It's not every day that Larry Summers writes a glowing book review so when it happens one takes note. House of Debt is an important quantitative study summarized with extremely accessible writing that is similar in style and quality to This Time is Different. Even the key message is similar: Debt matters.
An important fact relating to the Great Recession is that "the United States witnessed a dramatic rise in household debt between 2000 and 2007 - the total amount doubled in the seven years to $14 trillion, and the household debt-to-income ratio skyrocketed from 1.4 to 2.1." This increase in debt was not evenly distributed, however; debt rose disproportionately among lower income and lower net worth households. As a result, when home prices fell, "The net worth of poor home owners was absolutely hammered ... From 2007 to 2010, their net worth collapsed from $30,000 to almost zero."
A key insight from the book is that the negative effects of lower home prices on income families rippled through the economy in the form of lower demand, lower prices, and lower employment. Whereas public policy has been focused almost exclusively on alleviating the banking crisis (which was and is a legitimate problem), it has almost completely failed to address the effects on lower income households. For economists and investors alike, it is important to understand that recovery will continue to be hindered until the prospects for these households improve.
by David Robertson, CFA
An important fact relating to the Great Recession is that "the United States witnessed a dramatic rise in household debt between 2000 and 2007 - the total amount doubled in the seven years to $14 trillion, and the household debt-to-income ratio skyrocketed from 1.4 to 2.1." This increase in debt was not evenly distributed, however; debt rose disproportionately among lower income and lower net worth households. As a result, when home prices fell, "The net worth of poor home owners was absolutely hammered ... From 2007 to 2010, their net worth collapsed from $30,000 to almost zero."
A key insight from the book is that the negative effects of lower home prices on income families rippled through the economy in the form of lower demand, lower prices, and lower employment. Whereas public policy has been focused almost exclusively on alleviating the banking crisis (which was and is a legitimate problem), it has almost completely failed to address the effects on lower income households. For economists and investors alike, it is important to understand that recovery will continue to be hindered until the prospects for these households improve.
by David Robertson, CFA
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