Charles Dickens on the Great Recession

In addition to attending my friends’ birthday party and meeting up with Turkey economists, I also had some time for sightseeing in London. Other than pub crawls, I visited the Charles Dickens Museum at 48 Doughty Street, which was home to the novelist from 1837 to 1839.
 
I saw the famous David Copperfield quote in the attic, where Mr. Micawber explains the difference between happiness and misery to young David: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
 
Dickens, who was affected by his own father’s financial problems and based Micawber on him, would have been disappointed to see that this valuable advice was not heeded nearly two centuries later – at least according to a new book by Atif Mian and Amir Sufi (A&A), professors at Princeton and University of Chicago respectively.
 
In the aptly-titled House of Debt, A&A challenge the traditional view of the 2008 financial crisis and the subsequent Great Recession, which places the banking system as the main culprit. They show that housing and durable goods expenditures plunged in 2006 and 2007, long before the Lehman collapse. The banks were dancing while the music was still playing at the time. And although Wall Street had recovered in 2009, Main Street remained depressed.
 
They instead argue, using detailed local data, that the key culprit was excessive household leverage. The mortgage lending led to a housing bubble, which left households with unsustainable debt burdens when it burst. The ensuing spending cuts of households led to the financial crisis and the Great Recession. A&A show that consumer spending fell more in areas with the most mortgage debt and largest declines in housing prices.
 
The Great Recession was no exception: Mortgages and consumer debt soared before the crash of 1929 and the Great Depression as well. You may argue that the United States, with its emphasis on home ownership, is different, but “evidence demonstrates that this relation is robust internationally.” In fact, as Nomura Research Institute’s Richard Koo pointed out two decades ago, a similar phenomenon happened in Japan, one from which the country has yet to recover.
 
While Americans are almost done with their deleveraging, Europeans have barely begun, as credit rating agency Standard and Poor’s outlined in a research note published on June 10. They argue that “eurozone deleveraging could stunt growth for years.” If Turkey’s largest export market were to remain a bleak house, we should fuhgeddaboud rebalancing from domestic to external demand and learn to live with our current account deficit.
 
This column is dedicated to my friend Esther’s father Jamie, who is a Charles Dickens fan. While he contends that he named his daughter after the Biblical Queen Esther, I’d like to think he was also subconsciously affected by the protagonist of Bleak House, his favorite Dickens novel.