A Guide to Essential Readings on Private Debt

A Guide to Essential Readings on Private Debt


Some of the best research on private debt.

Lord Adair Turner’s book is an examination of why those who were in charge of regulating the global financial system, including himself, got it so wrong in 2008: they ignored the destabilizing effect played by private debt. In his book, Turner outlines the latest research on private debt and its impact on the economy at large. He also provides an answer to the question of what is to be done to restart global growth, proposing central banks create money to finance global investment. 

Atif Mian and Amir Sufi, House of Debt

In the House of Debt, Mian and Sufi show that the Great Recession was caused by a large run-up in household debt following by a significantly large drop in household spending. Thus, instead of focusing on repairing bank balance sheets to restart the lending channel, the authors argue that the most effective policy intervention in the face of this kind a balance sheet recession is to restructure the debt of households.

Carmen Reinhart and Christoph Trebesch “Debt in a Distant Mirror”

Reinhart and Terbesch explore the impact of sovereign debt relief on economic growth and other measures of economic performance. In a study of 45 crises, they find that debt restructuring resulted in higher GDP and higher income levels, and lower government debt and debt servicing burdens.

Francesco Giavazzi, Guido Tabellini, “How to Jump Start the Eurozone Economy.”

Giavazzi and Tabellini argue that quantitative easing is not enough to jump start aggregate demand in the Eurozone. Instead, it should be combined with greater flexibility on budgets, tax cuts, and the monetization of long term public debt through its purchase by the ECB.

Luigi Buttiglione, Philip R. Lane, Lucrezia Reichlin and Vincent Reinhart, “Deleveraging? What Deleveraging?

This study documents a trend of rising debt since the 2007-08 financial crisis. It has a strong chapter on the role of leverage in creating financial crises and a good summary of the policy approach needed to restart economic growth and avoid future crises.

Luigi Zingales, “Does Finance Benefit Society?”

Luigi Zingales of the University of Chicago’s Booth School of Business outlines how academic researchers should study the financial sector in the wake of the 2008 financial crisis.  He notes that academia has tended to ignore that without proper rules finance can easily generate into rent-seeking.  He then explains what finance academics can do in their research and educational role to promote good finance and minimize the bad.

McKinsey Global Institute, “Debt and (Not Much) Deleveraging”

The McKinsey Global Institute’s 2015 survey finds that in the seven years following the world financial crisis, from 2007 through the second quarter of 2014, global debt grew by $57 trillion, outpacing world GDP growth and raising the global debt to GDP by 17 percentage points. Government debt levels increased in nearly all developed economies, while private leverage expanded in emerging markets, in general, and in China, in particular.

Michael Kumhof, Romain Rancière, and Pablo Winant, “Inequality, Leverage and Crisis.”

This important paper studies how high household leverage and the financial crises that follow the build-up of that leverage can be caused by growing inequality. They find that rising inequality stimulated rapid credit growth and in both the 1920s and the decades leading up to the 2008 financial crisis. Based on these two cases, they develop a model for measuring how changes in the upward distribution of income can increase the credit supply and thereby allow the poor and middle-income households to take on more debt to maintain consumption levels at least for a time.

Michael Pettis, “Inverted Balance Sheets and Doubling the Financial Bet”

In this essay, Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing, explains the relationship between debt buildups in the private sector and slowing economic growth.

Oscar Jorda, Moritz Schularick, Alan M. Taylor, “When Credit Bites Back: Leverage, Business Cycles, and Crises?”

This paper surveys 200 episodes of recession comparing the credit intensity of the expansions that preceded them. It concludes that there is strong evidence to suggest that the more leverage present in the expansion, the deeper and more long lasting the recession.

Raghuram G. Rajan, Has Financial Development Made the World Riskier

Rajan writes that despite the many benefits offered by the expansion of financial markets, the increasing complexity of the financial system and the instruments engendered by financial innovation has led to more risk and financial fragility. He suggests that in particular policy-makers should be aware of how new monetary regimes can be pro-cyclical exacerbating the boom-bust tendencies of finance.

Richard Koo, The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession.

Koo’s book explains the differences between balance sheet recessions occasioned by the build-up of private debt and ordinary business cycles that results from the cyclical ebb and flow of business expansion. Koo suggests that Japan’s recession in the early 1990s was a “canary in the coalmine” for understanding the “Great Recession” that followed the 2008 financial crisis. He explains why the deleveraging of private firms and households following a large increase in debt must be accompanied by an increase in government debt if economies are to avoid an even depression.

Richard Vague, The Next Economic Disaster: Why It’s Coming and How to Avoid It.

Entrepreneur and credit investor, Richard Vague, explores how every major financial crisis in modern capitalism has been preceded by a large increase in the ratio of private debt over GDP. Vague warns that unless debt levels are reduced through a restructuring of individual debts by banks, the American economy will continue to grow at a slow pace. 

Willem H. Buiter, “The Simple Analytics of Helicopter Money: Why It Works – Always”

Willem H. Buiter reviews the ways in which Milton Friedman’s “Helicopter Money” approach, or the expansion of base money supply, can be used to finance government stimulus and boost aggregate demand.  Buiter argues if certain conditions are met there exists a combined monetary and policy action that would boost private demand—in principle without limit.  Therefore, deflation and secular stagnation are not inevitable but are policy choices.