Question

What was the root cause of the liquidity crisis according to Atif Mian and Amir Sufi in their recently published book House of Debt?

Answer 1

The Financial (liquidity) crisis 2007-08 has been called as the most severe economic crisis since Great Depression. Not only did it cost around 8 million jobs ( between 2007 and 2009) , it led to increase in household debt by twice until it reached 14 trillions. Very many economists believe that uncontrolled mortgage lending created housing bubble that led to striking increase in household debt load accentuating a crisis in the economy.
On the other hand, Atif Mian and Amir Sufi in the book "House of Debt" argue differently and bring about the analysis of financial crisis from another angle. They assert with the help of reliable data that the root cause of liquidity crisis was huge increase in household debt that caused subsequent decrease in household expenditure and finally economic downturn. In a way, the authors seems to suggest that it was not the defective banking that created the liquidity crisis by mortgage lending, but over indebtedness of households had the greater role in bringing about recession.