Sufi and Mian continue to develop their argument in: Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t:
Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession. Part of this difference can be seen in consumer spending. The housing crash killed retail spending, which collapsed 8 percent from 2007 to 2009, one of the largest two-year drops in recorded American history.2 The bursting of the tech bubble, on the other hand, had almost no effect at all; retail spending from 2000 to 2002 actually increased by 5 percent. What explains these different outcomes? In our forthcoming book, “House of Debt,” we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash. The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending. What about the tech crash? In 2001, stocks were held almost exclusively by the rich. The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.
David Beckworth counter argues in: “What Caused the Great Recession: Household Deleveraging or the Zero Lower Bound?”:
While it is true there was far more U.S. household debt leading up to the Great Recession and that cross country evidence shows that countries with more debt were generally hit harder during the crisis, I think they are confusing a symptom with the cause. In my view, the underlying cause was interest-rate targeting central banks running up against the ZLB. (Yes, there are ways around it for a determined central bank but most did not fully explore these options.) The failure by central banks to get around the ZLB caused most of the household deleveraging, not the other way around. Monetary policy, in other words, was too tight during the crisis.
The fact is that in after 2007 the poor man was doubly penalized. On the one hand his nominal income took a plunge and insult was added to injury when his job was taken away! The chart compares nominal income growth (NGDP) during the two cycles. Is it hard to see why consumer spending (and all the other components of GDP) and employment crashed? PS. Don´t miss Mark Sadowski´s comments below. At the very end he writes, quoting I. Fisher:
On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.
That the price level is controllable is not only claimed by monetary theorists but has recently been evidenced by two great events: (1) Sweden has now for nearly two years maintained a stable price level, practically always within 2 per cent of the chosen par and usually within 1 per cent. Note Chart IV. (2) The fact that immediate reversal of deflation is easily achieved by the use, or even the prospect of use, of appropriate instrumentalities has just been demonstrated by President Roosevelt. Note Charts VII and VIII.”
It’s a tragic shame that we’re still debating Irving Fisher’s original point 81 years later.