At long last, economists appreciate that private debt was the catalyst for the crisis

Paul Ormerod in City AM:

A particularly interesting paper in the journal is by Atif Mian of Princeton and Amir Sufi of Chicago. Their focus is considerably wider than the crisis of the late 2000s in the United States. They quote empirical studies across some 50 countries with data going back to the 1960s. They found that a rise in household debt relative to the size of the economy is a good predictor of whether GDP growth will slow down.

Rickard Nyman, a computer scientist at UCL, and I applied machine learning algorithms to data on both public and private (households and commercial companies) sector debt in both the UK and America. We find that the recession of 2008 could have been predicted in the middle of 2007.

This is news? People have known about the 18-year credit/land price bubble cycle for over a century. Fred Harrison predicted the 2007-08 credit crunch in 1997. The Neo-Libs and Homeys like to airbrush this out of history and pretend that economic depressions are somehow random events.

Perhaps the most striking result is that public sector debt played little role in causing the crisis. The driving force was the very high levels of private sector debt.

Again, this ought to have been clear to anybody with half a brain. Labour’s deficit spending was A Bad Thing, but clearly not the cause of the credit crunch. I can understand why Tory politicians claim that it was, but I am baffled why so many Labour politicians go along with the lie (a particularly twisted kind of Indian Bicycle Marketing).

A critic might say that this is simply a case of generals fighting the last war. True, we don’t know whether a completely different nasty event lies around the corner. But at long last, economists appreciate the fundamental importance of debt and finance in Western economies.

There’ll be another credit crunch in 2025-26, full stop. That is the next ‘war’ and we haven’t properly won the last won yet.