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1-Page Summary of House of Debt

Overview

After The Music Stopped is an analysis of the causes of the financial crisis that happened in 2008. It explains how and why things happened, as well as who was responsible. Finally, it also discusses how the government reacted to stop panic from spreading further and rescue the economy.

The Great Recession had a huge impact in the global economy. It’s still felt today, and many people are still trying to recover from its effects. House of Debt shows that consumer debt is what caused the recession, which has been proven through research by economists. The book also explains how we can avoid another recession in the future, so it’s worth reading for anyone who wants to learn more about economics or prevent another economic crisis like this one.

In addition, we learn from the author that a higher credit score can lead to a greater chance of defaulting on financial debt. The gold standard has been abolished, and it’s helping people avoid defaults. The dot-com bubble wasn’t nearly as damaging as the Great Recession.

Big Idea #1: A large amount of consumer debt is the main cause of a severe recession.

What causes severe recessions? Some economists and analysts think they’re triggered by natural or political disasters. Others think irrational beliefs cause them, but this is rarely true. In fact, high household debt leads to a recession. From 2000 to 2007, US household debt doubled in size, reaching $14 trillion. Likewise, the ratio of debt owed to income earned also jumped from 1.4 to 2.1

The Great Depression was also caused by a huge amount of debt. In the 1920s, consumer debt increased and mortgage debt tripled.

Large debt loads lead to reduced spending, which leads to a recession.

There is a clear correlation between household debt and the amount of spending cuts observed during a recession. This was seen in Europe and Asia, where increases in household debt before 2007 correlated to declines in spending after 2007.

For example, Ireland and Denmark both had more debt than the United States, so we can predict that their recessions will be worse. If we look at household debt increases and consumer spending cuts, then we’ll know how severe a recession is going to be. As it turns out, banking-crisis recessions are devastating when there’s high levels of private debt. Without this high level of private debt, banking crisis recessions are similar to normal ones.

Big Idea #2: Poor people are affected more by declining housing prices than rich people.

Home ownership is an important part of the American Dream. People who wanted to own homes were driven into serious debt in the early 2000s, creating a housing bubble. The poorest people were affected by this because they had less money and couldn’t afford as much house.

First, interest payments flow from the poor to the rich. If you take out a loan to buy a house, you’re borrowing money from the bank and are considered the junior creditor on that mortgage. The bank is your senior creditor—they’re lending you money so that you can then borrow it back in order to purchase something (a home) with it. Therefore, any losses incurred while buying or selling homes will first affect your creditors before affecting yours; only if there’s further damage will your own assets be affected.

The reason why people with less are the most affected in a recession is because they have more debt. They borrow more and so when there’s a downturn, they lose out on their assets. The rich don’t borrow as much, which means that they also don’t lose as much during the economic crisis. The poor had 80% of their money tied up in debt and only 20% was saved for them to use. By comparison, the richest fifth of Americans had 10% borrowed money and 90% savings for them to spend or invest later on down the road (and this doesn’t even include other forms of wealth like stocks). This isn’t even all: borrowers have it worse than those who aren’t borrowing at all because if these homeowners defaulted on payments then banks could foreclose their homes and sell them at discounted rates; this would be harmful to everyone else living around there since prices will fall just by having one foreclosure nearby; during the recent financial crisis, three times more foreclosures occurred than before 2001 (the previous peak year); together with short sales making up 40 percent of total house sales