How did this happen? Why did lenders suddenly shower less-creditworthy borrowers with trillions of dollars of credit? Mian and Sufi demonstrate this was enabled by the securitization of home mortgages by investment banks that did not seek federal guarantees from Fannie and Freddie—so called private-label securities, made possible by financial deregulation and the glut of cash in world markets in the wake of the Asian financial crisis of the late 1990s. That private-label mortgage-backed securities were at the core of the housing meltdown is no longer in doubt, but what Mian and Sufi bring to the debate is how an unequal distribution of debt magnified the economic risks—based on their path-breaking microeconomic research—and a new framework for considering who is to blame among policymakers for the still reverberating debacle.

Unfortunately, the two authors don’t provide answers for why so many households took on so much debt, but they do paint a cautionary tale. This is a critically important contribution to the policy debate now raging over what Congress and the Obama administration should do in the way of reforms to the housing-finance industry. And, it’s important to our understanding of whether and how inequality affects economic growth and stability. What they demonstrate is that as the U.S. housing bubble burst and home prices began to fall in late 2006, the unequal distribution of debt amplified the decline in consumer spending and the consequence was an economic disaster. Mian and Sufi’s research leads them to conclude that the crisis was avoidable if only economists had used the right framework to see what was happening around them at the time.

“Economic disasters are man-made,” they write in the opening pages, “and the right framework can help us understand how to prevent them.” By the end of the book, the reader cannot but be left appalled at the sheer enormity of the policy failures. It’s not just that 7.4 million workers lost their job during the years of the Great Recession of 2007-2009 but also that the employment crisis continues to this day. While jobs are no longer being shed at the rate of 20,000 a day, the share of the U.S. population with a job fell to a low of 58.2 percent in November 2010 from a high of 63.4 percent in December 2006, but has only increased by a fraction of a percentage since then, hitting just 58.9 percent in April 2014.

Missing the housing bubble was a massive failure on the part of policymakers. As a result, our new normal is one where there are nearly 10 million fewer people at work. This book's contribution helps us understand the important mechanisms through which this occurred.

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I watched the housing and financial crises unfold from my perch as staff for the U.S. Congressional Joint Economic Committee. By the time Lehman Brothers failed, the mantra on Capitol Hill had been articulated by former Treasury Secretary Lawrence Summers, who said that any recovery package had to be “timely, targeted, and temporary.” But the stimulus that emerged was not specifically targeted at homeowners in foreclosure. If Mian and Sufi are correct, the biggest failure was—and continues to be—leaving families struggling with mortgages they cannot afford because of the fall in home prices.