SPEAKER: OK.
My slides are coming up.
Maybe I'll just start.
So let me just first preface with a note
of humility [INAUDIBLE].
I really don't know anything about religion
at an academic or scholarly level.
I'm still working on increasing my knowledge in my own faith
tradition, nevertheless trying to think about others.
But I'm going to talk about what I do know about it, that is,
the goal of death in thinking about relative quality.
And in the end, I'll talk a little bit
about some religious traditions that have
something to say about that.
As all of those here who do have a background
in studying religion at the Divinity School
there is a very long history of thinking about death
in most faith traditions.
And I think that's for good reasons.
And it's been interesting to me coming
at it from an [INAUDIBLE] economist,
not coming at it from a religious perspective at all,
many of the lessons that come out of our religious traditions
start to make a lot more sense once you
see some of the things that come out
of the financial system that rely so heavily on death.
So let me show you some pictures to motivate
some of the research my co-author [INAUDIBLE]
and I had done.
It turns out you end up seeing a very small relation
in the data between increases or levels of debt
and the severity of the decline in, say, household standing
during economic downturns.
So this picture is showing you the 2006 household
death to income ratio across the US states.
We have our usual suspects here on the right, California,
Florida, Nevada, and Arizona, states
that had very big booms in household debt from 2000, 2006.
Now, [INAUDIBLE] to see the per capita consumption
decline during the great recession.
So states that have the biggest or highest levels of debt going
into the great recession were exactly
the states that saw the most dramatic decline in household
spending.
As you may think it's just the US, turns out
you can do this exactly same exercise
over 40 years across 30 different countries,
and you see the exact same relation.
And it turns out that one of the best predictors of seeing
a big decline in economic activity TV or a big increase
in unemployment, if you want to take it on terms of what
is actually means for people on a very local basis,
again, big expansions in household debt
tend to precede big, economic downturns.
If you look at the countries in the advanced world that
have the most severe economic downturns over the last 10
years-- we're actually a little higher
than Spain-- breached all [INAUDIBLE]
increases in household debt proceeding those big income
downturns.
OK.
In that this relation is so robust
that you can actually look at it at a global level.
You can just say, how has an increase in global household
debt predict global GDP growth?
And you can just do a strand time series correlation
with every [INAUDIBLE] a year.
And it's turned out again to see this happening,
that time periods that are proceeded
at a global level with a big rise in household debt
tend to predict bad economic activity going forward.
We only had the [INAUDIBLE] back in the '60s.
Of course, the Great Depression would
make this biggest point even more [INAUDIBLE]
than what I've shown you here.
The Great Depression was, of course,
preceded by the roaring '20s.
And they call them the roaring '20s for a reason.
There was a huge increase in household debt
during The Great Depression in many countries.
That is not so much mortgage debt
as it much is consumer debt associated
with buying autos, buying sewing machines,
a lot of the consumer girls that became available
during the '20s.
So a lot of our research is about what explains
this very striking correlation.
Why would elevated household debt
tend to lead to bad economic outcomes, higher unemployment,
worse GDP growth, more recessions?
Let me first start by explaining the way debt works.
Those of us who work over at the business school,
teach finance, just take it for granted.
It's obvious how debt works.
But I think even thought many people in this room
may have a mortgage, they may not actually
understand exactly how debt works
in the financial contract.
What I mean by that is debt is a financial contract
in which some party-- you can call
them the agent, or the homeowner,
or the entrepreneur-- takes a financial obligation.
And he raises money or gets money from somebody else,
and then is going to pay back that money over some time.
And the financial contract is going
to govern the way in which we decide to pay back.
Equity, I think, is the most simple contract to think about.
I make a certain amount of money,
and I give you some percentage of it.
So think of somebody who's starting a business.
And if I make $100 a year, I give you 50%.
And in return for that, you give me
some money up front to help start my business.
Debt is actually a weird financial contract.
It's very common, but it actually
is weird and in a sense that it doesn't have that property
that we equally share, the upside
and downside of my activity.
Instead, debt very much imposes the risk on the equity holder,
or the homeowner, or the entrepreneur,
the person who's getting the financing up front.
So to make sure everyone understands
that-- those of you who own a home with a mortgage
may be saying, wait what is he saying?
I've taken more risk?
Yeah.
You've taken a lot more risk by getting a mortgage.
And let me explain how that works.
Here I have a very similar example.
You may be told that there would be no math today.
But there's a little bit of math.
So work with me here.
You're borrowing a $200,000 loan.
I'm going to make you a very responsible homeowner.
So you're going to put 50% down.
You're going to have $100,000 that you're
going to show up at closing.
You're going to get [INAUDIBLE] $100,000.
The mortgage is going to wire in at $100,000.
So you're equity in the home is $100,000.
And the bank has provided you a mortgage of $100,000.
That's $200,000 total.
You buy the home from the seller.
The seller walks away.
They're out of the picture.
Now, let's suppose that house prices
drop by 40%, which is exactly what happened in the United
States with the country as a whole.
In some areas like Nevada, they dropped high 60%, 65%.
In some areas, like Kansas City, they didn't drop hardly at all.
But let's just get the average.
So let's suppose they dropped by 40%.
The question is what happens to the value of these two claims?
Who bears that loss?
The house is now only worth-- I won't make you do that.
We can just talk about it.
It's worth $120,000.
$120,000 is the new value of the home.
The original home value is $200,000.
Who's position gets hurt here.
Who's position takes that loss.
Well, finance people know quite well that the equity
holder takes the full loss.
Your home equity is now worth $20,000.
Now, if that's confusing to you-- and you're
technically right.
That seems unfair.
Think about what happens when you try to sell your home.
If you try to sell your home at the new price, $120,000,
you're going to go to the closing company.
Instead, the buyer is going to wire $120,000,
you're going to pay off the $100,000 mortgage.
And what are you left with?
You're left with $20,000.
You just lost $80,000.
The bank took no loss.
So the dividing characteristic of debt
is that it imposes the loses in case of a downturn on one
side of the relation.
And that is the person who's borrowed the money.
Now, likewise, house prices go up,
you disproportionately gain from that.
So it isn't just one side.
If you [INAUDIBLE] or claim, you're
basically going to have to have a higher percentage point
increase for the amount of money you put in.
So you're [INAUDIBLE] on both sides.
You get more if things go well, but you're also
bearing more of the loss if things go backwards.
And this is [INAUDIBLE] of course,
I made you a responsible homeowner.
You put 50% down.
You may be asking to yourself a question.
Well, let's suppose I only put 20% down,
and house prices went down 40%.
Well, then you're under water on your home.
You've been completely locked out.
And at that point, the creditor might take some loses.
But that raises a very interesting question.
And that is, in this relationship,
what happens to the individual who's
loses more than they put in.
Well, first of all, if you stay in the home,
then you're essentially paying a bank on interest payment
for an asset you don't even have any ownership of.
[INAUDIBLE] mortgage. [INAUDIBLE]
If you choose to walk away, well, let's not kid ourselves.
There are costs of walking away.
Your credit score will be very dramatically affected.
You may not be able to buy a home, buy a car.
You may not even to get a cell phone [INAUDIBLE]
wreck your credit score.
When [INAUDIBLE] brings me to the this cartoon, which I just
love, where a man was saying, we will absolutely
start lending again as soon as we finish
all of our debt increases.
So in some sense, there is no notion of limited liability
on a household side.
Creditors really can come after you.
They can come take your assets.
They can cripple your credit score.
In Spain, the mortgage actually follows you
for the rest of your life, even if you
give the home back to the bank.
So the terms of the debt can be very, very harsh.
And I think that's starts to sound like reasons why this
shows up in religious traditions,
that when you have the relationship that potentially
is very unfair to one of the parties, then
you get the role of social justice, moral virtue,
these kinds of things coming to that relationship [INAUDIBLE].
So the summary of the argument is basically
that debt concentrates risk on the debtor,
and the lender is [INAUDIBLE].
But then how does this relate to wealth inequality?
So far [INAUDIBLE].
There's a debtor and there's a creditor in this relationship.
Well, who are the lenders and who are the debtors?
I always like to say, look, banks aren't people.
Banks are owned by people.
And we need to think about who owns the bank when we're
thinking about ultimately who's making that loan,
and is there [INAUDIBLE] credit during this relation.
And it basically is the rich.
The rich own the bank.
How do they own the bank?
Because they're the ones with financial assets.
They own bank stock.
They own bank debt, and they have most
of the deposits in the bank.
And you see that very clearly in this picture.
Here I'm saying let's get all the homeowners
in the country in 2007.
Let's split it up into 20 percentiles,
the rich being on the right, the poor is on the left.
And it's shown here a balance sheet ascension.
The poor will [INAUDIBLE] understand.
They have household debt.
They have home equity, but it makes up
a small fraction of your portfolio, and the rest of that
is financial wealth.
So you can think of that of having $500,000 total wealth.
Maybe they have $50,000 mortgage.
But if they have $400,000 of equity,
the S&P 500, stocks in banks, and they sell the home equity.
The poor are different in two ways.
One, they are much more [INAUDIBLE].
They have a lot of debt.
They have basically $100,000 mortgage and $100,000 in wealth
and an $80,000 mortgage.
And [INAUDIBLE].
They basically don't hold almost any financial assets.
So the average low income person in 2007
who's a homeowner, basically has a very lavish home
and no financial wealth.
When I tell you those two things and then I tell you
that house prices are about to drop 40%,
and I've already shown you who bears the losses,
it should come to no surprise whose wealth
is going to get totally destroyed
in the great recession.
It's going to be the poor because they only
have home equity, and it's a letter of claim,
just like that example, and that's
exactly what you see in the data.
So here I've shown for you the wealth position.
And the poor is 20%, and the rich
is 20%, from 1990 through 2010.
And what do you see?
You see that the poor have about $30,000 total of wealth.
Before they raised that, and then it basically goes to 0.
When I show people this picture, they're always stumped.
You're like, how can it go to 0?
It goes to 0 precisely because of leverage.
Because they have so much debt, when house prices fall 40%,
they use 100% of their wealth.
That's how leverage works.
That's why it's such a dangerous instrument that has so
much risk associated with it.
Notice the rich [INAUDIBLE] they lose more money.
They [INAUDIBLE].
But in percentage terms, it hardly affects them at all.
They don't certainly lose all the wealth
they've accumulated since 1993.
It's what happens to, of course, 20%.
So the bottom line point that we're trying to make here
is that the marginal density to spend on all the poor
is much higher.
So [INAUDIBLE], when they impose the loses on the poor,
they of course stop after spending massively.
In contrast to the very rich, if we impose the loses on them
it wouldn't affect their spending at all.
Think about BIll Gates.
If Bill Gates loses $35,000, Bill Gates
doesn't even know he lost $35,000.
So a stir is not going to affect his spending.
If a homeowner who only has $35,000 of wealth
loses $35,000, of course, they're
going to pull back on asset building spending, which
shouldn't be so surprised that these elevated debt levels tend
to proceed big drops in economic activity,
because when imposing loses when the crash comes right
around the set of people who are going to have
the highest [INAUDIBLE].
So the summary of the argument-- and I'll basically conclude--
is that debt concentrates the loss of [INAUDIBLE] the highest
intensity to spend, [INAUDIBLE] overwhelm the economy, which
makes it very difficult to adjust.
A standard neoclass of economics is going to say,
well, prices adjust, interest rates adjust,
everything will be fine.
When you have a [INAUDIBLE] like this this big,
it's very hard for things to adjust in order
to keep economic activity going.
And a system like that [INAUDIBLE] requires
massive debt restructuring.
You have to have it in order to go forward or else
you're going to continue to see really bad [INAUDIBLE]
increase.
You don't actually restructure the debt,
you're not going to get out of it.
So it's not only fair, I should point out.
It's not just about distributional issues.
It's actually better off for the rich themselves
if debt is restructures.
That's the irony of this in regard to [INAUDIBLE],
that ultimately, when the poor cut back
on their spending, even middle class,
upper income people may lose their jobs.
If you look at this int he United States--
it's quite beautiful, actually.
A state like Tennesee-- I'm going
to pick on Tennessee a bit because Senator Corker was
very adamant that we shouldn't be bailing out homeowners.
We shouldn't be restructuring debt.
And he basically had this quote, which is that,
[INAUDIBLE] who were irresponsible during the boom.
And they didn't want to bail out their homeowners.
Let them do it to themselves.
We tend to see it as over borrowing.
We didn't have a big housing loan,
so we shouldn't have to pay the cost.
Well, those of you who know Tennessee well,
there are a lot of auto plants in Tennessee.
And those auto plants produce cars.
And a lot of them were [INAUDIBLE]
actually employed them.
So a lot of people lost their jobs
in Tennessee because of the housing loss in [INAUDIBLE].
So the [INAUDIBLE] responsible should only
have to pay doesn't make a lot of sense,
because at the end of the day, all of us
end up suffering the consequences
if we don't restructure debt.
And that's exactly what you're seeing in Europe as well.
Germany ends up suffering massively
because they want to impose these loses on Greece.
And in fact, actually, some of my colleagues
that do behavioral sciences, psychology research
say there's a lot of evidence that
shows that in the debtor/creditor relation,
the creditor actually wants to enclose loses on the debtor
even if it makes the creditor worse off doing it.
Just think through that.
So there's something very interesting
about this debtor/creditor relationship
that if I could accomplish anything for the Divinity
School scholars and the religious scholars is just
to point out that we should explore this more.
What is it about this relationship?
Why do we have these religious traditions talking about it?
And why do you see this in experimental settings
where creditors really think they
have a right to [INAUDIBLE] the debtor,
even if it's better off for them to forgive.
And I think that brings me up to a couple of quotes [INAUDIBLE].
[INAUDIBLE] home is happiness, which is beautiful.
It seems like people 3.5 thousand years ago figured this
out and we somehow have not figured it out.
So [INAUDIBLE] that code, which we all learned in whatever,
humanities class in high school, it basically
understands that if there's a system wide shop,
we have to forgive debt. [INAUDIBLE]
In that year, you may not get [INAUDIBLE].
[INAUDIBLE] they figured this out maybe 4,000,
5,000 years ago.
We still haven't figured that out.
Now we say, well, people are lazy.
They should've borrowed so much.
Even though it's not obviously-- think
about a homeowner in Modesto, California
who put down 20% down on her home.
We all say that's responsible.
That's a responsible thing to do.
Well, house prices in Modesto fell 50%.
And somehow we're going to blame for the fact
that house prices fell 50%.
It's crazy.
And then my own [INAUDIBLE], which I think [INAUDIBLE] I'll
say, [INAUDIBLE] somewhat something about,
is [INAUDIBLE] which is basically [INAUDIBLE] talks
about wealth and equality debt.
And it basically says [INAUDIBLE].
So I'll leave you with that.
I'm happy to Q&A to get some knowledge,
and I'm looking forward to hearing
more the religious scholars on how this all
relates to our [INAUDIBLE].
Thanks so much.
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