House of Debt: Debt, Recession, and Mortgage Reform

This article provides an in-depth analysis of the financial mechanisms described in 'House of Debt,' focusing on the destructive role of the leverage multiplier during periods of economic downturn. The authors explain why a high LTV ratio leads to a sharp decline in consumption among individuals with the highest marginal propensity to spend (MPC). The article criticizes the traditional 'banking view' approach, which downplays the distributional effects of debt. The key solution presented in the paper is a reform of the mortgage contract toward a Shared Responsibility Mortgage (SRM) model. Such an innovation would allow for the systematic sharing of the risk of falling property prices between financial institutions and borrowers, preventing a spiral of foreclosures and negative externalities that destabilize the entire economy.