1. Abstract/Summary: Clear empirical evidence that larger increases in household debt pre-recession are associated with larger subsequent recessions. Pathway is: 1) credit expands (savings glut, inequality, financial liberalization), 2) house prices rise, 3) households borrow aggressively against their house, to spend more, 4) this extra spending expands the real economy, 4) slack causes the economy to slow-down, 5) the slow-down is made worse by reduced household spending, foreclosures, banking crises & the lower bound of interest rates.
2. Clear empirical evidence that larger increases in household debt pre-recession are associated with larger subsequent recessions (US & EU evidence).
3. Why does household debt rise suddenly? MS2018 think it is due to increases in credit supply, not credit demand (due to permanent income). Evidence comes from US banking deregulation, countries joining Euro and US deregulation, all of which are associated with bigger booms & busts.
4. Do house prices cause increased credit, or does increased credit increase house prices? MS2018 argue that "a substantial body of research .. shows that exogeneous changes in credit supply have quantitatively large effects on house prices".
5. Does credit supply boost economic activity through investment or household demand? MS2018 argue the latter: Households borrow aggressively against their rising house price, enabling them to spend more (e.g. on retail and construction), boosting economic capacity (and setting up the conditions for the subsequent crash).
6. Why is the bust so severe? Fisher's debt-deflation-hypothesis: economic slowdown raises the burden of household debt, so households cut spending even further. As economy contracts, wage-stickiness, the lower-bound of interest rates, foreclosures and banking crises exacerbate the crash.
7. Where does the credit expansion come from? Demand**:** Relaxation of LTV limits, differing levels of optimism. Supply: global savings glut due to developing world, OPEC surpluses, wealth inequality, financial liberalization/financial deregulation.
8. Conclusions: Boom-bust cycle is explained by the "credit-driven household demand channel": 1) households increase debt because of exogeneous shocks to credit supply (not a permanent income shock) 2) they increase spending, expanding economic activity. 3) When a downturn is triggered, stickiness & banking disruptions exacerbate the crisis.