QE has driven corporate pension liabilities sky-high, and MPs are considering softening inflation-linked promises amid complaints over generational inequality. But British companies’ ever-increasing dividends makes such a move politically tricky.
The authors are experts at crunching microeconomic data on American borrowing patterns and uncovering explanations for what they see. Their starting point is the remarkable statistic for US household debt, which doubled to $14 trillion between 2000 and 2007. This build up of debt was responsible for the ensuing havoc because of its effect on borrowers, Mian and Sufi argue.
To understand this argument, consider mortgage borrowers versus those who invest in their mortgages via bank deposits. The borrowers tend to be poorer than the investors, who have spare cash. As Mian and Sufi put it, a poor man’s loan is a rich man’s asset.
However, the risk distribution is highly asymmetric because mortgage holders have a senior claim on property while the borrowers’ equity claim is junior, and gets wiped out first. When US house prices fell from late 2006 onwards, losses were concentrated among the poorest segment of the population who had levered exposure, while the richest segment ““ the savers ““ were cushioned.
That explains why inequality increased during the Great Recession, but Mian and Sufi don’t stop there. Using economic analysis that reads like a detective story, they show how the evaporation of poor peoples’ wealth led to a collapse in spending, effectively causing the Great Recession itself. To show causality, they point out that spending initially fell the most in areas of biggest housing wealth declines.
When I was in my twenties, I worked on a film being shot on location in the London borough of Newham. The film itself, which starred Jude Law and Sadie Frost, was forgettable, but one memory that stayed with me was the all-pervading smell of refined sugar from the nearby Tate & Lyle factory by… Continue reading..
For as long as most people can remember, UK municipal finance has been safe and boring. In the wild days of the 1980s, Hammersmith & Fulham council almost went bust speculating in derivatives, and was saved by a landmark House of Lords ruling. Since then, UK council borrowing has been tightly constrained by central government while derivative use has been banned.
24 years ago I was a graduate student studying earth and planetary science at Harvard. My advisor, Professor Mike McElroy, was an expert on atmospheric chemistry and I helped him teach a course to 300 undergrads in what was known as the 'core curriculum'. As a special treat for the students, McElroy invited his friend,… Continue reading..
Today, I participated in a panel discussion at the Economist Bellwether Europe conference on 'A Vision for Europe', together with Estonian finance minister JÃ¼rgen Ligi, head of markets at the UK Financial Services Authority Alexander Justham, and the chief executive of the Association for Financial Markets in Europe, Simon Lewis. Below are my answers to… Continue reading..