The cause of the crisis was not the
financial crisis and the high indebtedness of the families. In the book they
present data showing that spending on housing and on durable assets fell
precipitously between 2006 and 2007, before the start of the financial crisis.
At the same time they prove that the resistance on the part of the small and
medium companies to request credit was not based in the approval to obtain it, but also that they
didn’t have much clients nor sales.
The authors present very convincing
data to prove their argument that the roots of the crisis are in the excess of
mortgage loans, which led to the swelling of the bubble in the real estate
sector and the excessive indebtedness of families. The deflation of the bubble
and the subsequent collapse in the value of the houses caused a drop in
consumption that generated a fall in economic activity that subsequently
affected financial institutions, some of which disappeared. The financial
crisis is, therefore, the cause of the crisis: the fall in consumption and
spending caused by excessive debt prior to the banking crisis. The book shows
how consumption and spending was more significant in the United States than in
the value of housing faster and in which companies more connected to housing.
His analysis is very important
because the cause of the crisis was not the rupture of the financial
intermediation system, as has been postulated so much in recent years, the
response to the crisis was not correct, and the measures that have been taken
to avoid crisis in the future or also the right ones. Mian and Sufi defend that
owed to Bush and Obama were due to the need to help families in debt excess,
which had to lead to a much faster recovery of consumption and growth, with the
consequent positive impact on sanitation of the banks.
Levered-losses were driven by an
excess of loans to subprime borrowers with a poor credit history, who in turn
were encouraged by the increase in demand and the need to offer low risk
products with a high yield. Excess losses to foreclosure inflicted to investors
due to fraud were substantial, prolonged through time, and concentrated in
economically fragile communities that did not recover from the financial
An example to illustrate how fraud
concealed increases in borrower leverage using the example of appraisal ination
in the 2006 sale of a condo in Chicago. The condo was worth $235,000, but the
builder was willing to inate the price to $255,000 and return the extra cash to
the buyer at the closing table. The buyer could then use the extra $20,000 as a
down payment for a mortgage with a loan-to-value ratio of just under 95%.
However, the true loan-to-value ratio was 100% because none of the borrower’s
own money was actually used for the down payment.