Two books on the twin housing and financial crises of the late 2000s debut this month, one by former Treasury Secretary Timothy Geithner and the other by economists Atif Mian and Amir Sufi. The two books offer decidedly different takes on whether the nearly insolvent financial system or embattled homeowners should have been the focus of policymakers responding to the crises. Our interest in both books is for the thinking behind the policy decisions that were made at the time or could have been made differently—not least because of the possibility of future crises in housing and finance.
Geithner’s book, Stress Test, released today, reprises his role as Treasury Secretary during the spring of 2009 as well as the President of the New York Federal Reserve Bank during the most intense days of the crisis in the fall of 2008. The book furthers the argument made by Geithner— now president and managing director of leveraged buyout firm Warburg Pincus—that saving the U.S. financial sector was the best policy response to the panic.
Geithner’s book and his view may be best read in context with another book to be released later this month. House of Debt by Princeton University economist Atif Mian and University of Chicago economist Amir Sufi is the result of their years of research into the role of household debt and its role in the Great Recession of 2007-2009. The two economists agree that some form of financial sector rescue was needed, but their recommended response to the Great Recession is quite different from Geithner’s. For the former Treasury secretary, the banking system was the source of the crisis and where it would be solved. For the economists, the problem was the high debt loads of households.
Matt Klein of Bloomberg View points out on Twitter that the publication of these books at almost the same time is an act of synchronicity. Indeed, the dueling-at-a-distance authors disagree on many fronts, but the role of the distribution of debt is a prominent one. Geithner’s view—Mian and Sufi call it the “banking view”—really doesn’t consider the distributional consequences in the government’s response to the twin crises. In Geithner’s view, if the banking system can be rescued and credit starts to flow again then the economy as a whole will be rescued. For Mian and Sufi, the distribution of household debt is front and center.
In their view, the distribution of losses in the housing was the cause of the crises because the mostly low- and middle-income homeowners who suddenly faced foreclosure ceased spending money, throwing the economy into recession and dragging the broader housing market. The proper policy response, they argue, would have reduced the mortgage debt for “underwater” households and therefore the most likely to spend and get consumption going again.
The importance of distribution in Mian and Sufi’s viewpoint can be seen in how they explain why the bursting of the housing bubble caused the Great Recession but why the popping tech bubble resulted in a much lesser one. The key difference: really only the rich owned the stocks that plummeted in price during the dotcom recession in the early 2000s, whereas a large swath of the U.S. population owned homes that lost value during the Great Recession
Arguments about the best response to the bursting of the housing bubble and the financial crisis will go on long after Geithner, Mian and Sufi stop writing. But as this debate continues, both sides need to recognize that the distribution of gains and losses in future crises will be perhaps vitally important.