Transcript Brandon Goedhart`s Slides, Mian – Sufi, Microdata and the Crisis

By:
Atif Mian and Amir Sufi
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Economic Crises, while undesirable, provide
unique opportunities to test and further
understand economic theory.
From the Great Depression we get:
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John Maynard Keynes fiscal theory
Milton Friedman Monetarist tradition
Irving Fisher Debt Deflation
Goal: Incorporate Micro data and
advancements in computational data to
understand origin of the recession
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Financial crises are almost always preceded by a
sharp rise in leverage or debt-based financing and
there are two competing explanations for this:
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Demand side or Supply side driven.
Demand side would be associated with positive
productivity and/or technology shocks, increasing
demand for credit.
Supply side would be associated with, in this case,
financial innovation(securitization).
Kindleberger: “in many cases the expansion of
credit resulted from the development of
substitutes for what previously had been the
traditional monies.”
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Zip code level data on household borrowing
points to supply driven.
Zip Codes that saw the largest increase in
home purchases from ’02-’05 experienced
declines in income.
Correlation between mortgage growth and
income growth is negative from 02-05, while
positive in all other periods since 1990.
In these zip codes mortgage denial rates
dropped dramatically and debt to income
ratios skyrocketed.
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Traditionally you price an asset by discounting future
cash flows. The availability of credit plays no role in
determination of asset prices. – A view which is now
considered to be too narrow.
Geanakoplos “variations in leverage cause fluctuations
in asset prices.” aka financial innovation or shifts in
supply of credit directly impact asset prices, creating
an important feedback mechanism.
Data suggests a credit-induced housing price Boom.
Bernanke: “the availability of these alternative
mortgage products proved to be quite important and,
as many have recognized, is likely a key explanation of
the housing bubble.”
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The growth in the mortgage credit and house
prices impacted economy through more than
just the construction sector.
The major accelerator effect was driven by the
impact of rising home equity on household
spending.
Existing homeowners borrowed 25-30 cents
against the rising value of their homes.
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This home equity based borrowing was not used to
pay down debt or purchase new properties, but
consumption and home improvement.
The home equity based borrowing channel was
much stronger among households with low credit
scores and high credit card utilization rates.
The most credit constrained homeowners were
most aggressive in their home equity extraction
response to housing price growth.
Accounts for $1.5 trillion increase in household
debt.
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An expansion in the supply of credit, coupled
with the feedback effect of borrowing against
rising house values by existing homeowners,
created an unprecedented growth in US
household leverage between 02-06.
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Central argument is that an outward shift in
the supply of credit from 02-06 was the
primary driver of the macroeconomic cycle of
02-09.
What caused the shift?
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Financial innovation
Subsidies for mortgage credit in the form of govt.
homeownership initiatives and implicit govt.
guarantees and expected bailouts.
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“The widespread availability of microeconomic
data has greatly enhanced our ability to
understand the fundamental driving forces
behind macroeconomic fluctuations and credit
cycles. Our research has employed
microeconomic data in order to understand the
link between household finance and the real
economy.”