joining us now is economics professor atif mian. professor, how did you and i caused a great recession? >> guest: so the basic idea can we give the agenda that which is that come the important thing to understand is why debt can be harmful for the coming. that's what the book is about. it's about understanding the mechanism through which that can at times be destructive. so we talk about what other mechanisms that make that destructive for the macro economy and what come in into the book we talk about how can remedy the situation and how we can improve the way our financial markets work. away that we can benefit from the financial markets but at the same time minimize the negative consequences of some of the excesses. quite naturally for various reasons but we need to have a system that can deal with those once we realize that somebody oversteps for example, in their borrowing. .. thank the equation and take a more holistic approach to the issues regarding that. >> host: what is your definition of debt in this book? >> guest: the definition of debt is important and the most important aspect of debt from the definition perspective that is relevant here is the fact that debt as we define it through the eyes of the financial contract does not allow for proper risksharing between the borrower and the lender. the key definition of debt it in the eyes of the contract that if things were to turn south, the standard market contract because if they decline by 10% 20% 30%, the borrowers still a litany amount of the lender. there is no risksharing of the downside. that is perfectly fine in the sense the parties understand that and voluntarily get into the contract. we try to emphasize that lack of negotiating, the definition of the downside turns out to be a good economy overall. so that lack of risksharing depresses the overall economy in the event of a negative u.s. downturn in house prices. >> host: so you are talking about household debt. what is the macro number when you look at household debt in the u.s. today in 2008 prior to the recession. >> guest: the book is primarily about household debt talking about the u.s. the number for the u.s. if you look at 2002 march 2007, the u.s. house vote at that time contributed close to $7 million in debt. that was more than doubling of household debt to gdp numbers over this type. this is a huge amount we have never seen a household in the u.s. and the consequences are extremely negative. having said that, this is not the only time this has happened in the world but not as part of the point that we try to make in the book is the episode of back him in the household followed by him as long recession that we had you met it is seen elsewhere as well. in europe, for example with similar dynamics generated by a similar run-up in different parts of europe. having said that at the beginning the key problem is the lack of a downside in those elements are present even in debt that may not be household that. it tends to be more sovereign debt. the problem is essentially the same, which is the economy is having problems dealing with the realization and because the debt wasn't written down quickly enough in the amount that it needed to that lack of risksharing between its creditors on the downside. but for the entire euro zone. that is one of the important messages of the book. the problems we talk about are not just problems of the borrower. that's how public policy should be there. >> but when you hear the term too big to fail, which is a public policy issue we've been dealing with the last couple years cover what is your sense of that. >> the too big to fail problem is clearly important and something we need to deal with. however, even let's say we dealt with the too big to fail problem in the society imagine a situation where we had the large banks allowed to go under. that would be better in many aspects. one particular problem will remain and if you go back to 2008 and imagine we let the banks not go under perhaps, but then restructure their balance sheets without taxpayer money being injected into it. so that will protect the system from the too big to fail problem because the creditors of the banks will be observed in the last the taxpayer's situation. but it would still not solve the other key problem which is the underwater homeowners will still be underwater. the underwater homeowners and those chasing the prospect will still be cutting back on their spending which will feedback into the climate. those consequences of high indebtedness pushing on the indebted homeowners in the event of a downturn. those problems remain even if you are able to deal with the too big to the problem under banking site. why we clearly need to address that, there is the second fundamental problem that we need to have better mechanisms for resolving the state of affairs where for whatever reason we get into a situation where people are over indebted and that needs to be solved by the restructuring of the existing debts. post is one of those structures or restructures you advocate? >> guest: there are different ways of approaching the problem. for example they have their own solutions. the book in particular dealing with market tends to be a very large market at the center of the crisis. the particular proposal is what we call shared responsibility market. the key idea is the markets we advocate is very much like what we have today with two additional ingredients. the first one provides the next is that insurance of a downside protection in the way the downside protection works is whatever the elements are that they are paying $1000 a month. if the macro environment changes in the city house price index which we have instead if your local house price index falls by 10% your monthly payment will also go down from a thousand dollars a month to $900 a month and falls by 10 percentage points. it will be a fortunate decline in the monthly payment. while your monthly payments decline, the important aspect of the suggestion is that you can trigger modernization schedule does not change. your principal being reduced every month will continue to go down and what that effectively means is when house prices your outstanding principal given the new market conditions. the entire foreclosure because the contracts people will remain above water. they will not cut back on the spending as they did. equally importantly, we will not have foreclosures to take people who feel like they don't own the house anymore that they just hand over the keys and walk away. will continue to have an equity stake in the house. the whole process is really dramatic coming on the market that depresses prices further with the initial downturn. with this feature of the contract the lender is not providing particular assurance and dare we charge for a price and interest rates will tend to increase if this is the only modification to an existing contract. you compensate the lender for providing and the element in the contract. the second modification essentially gives the lender and upside in this contract. in particular at the time of homeowners whatever the net capital gain is if it's $100 the lender gets 5% of that. five dollars at the initial investment. we do the math in terms of the sufficient to pay for the insurance that the lender is providing a basically they have been regularly in the amendment. a small upside is to make the lender will hold by providing this insurance. that will not change the upfront cost of the interest rate that gets charged up for a but now the borrower is protected on the ballot side and in turn gets a small piece of the upside, which many of the market are very happy because the upside gives them a price which tends to typically go in overtime. they are in a constant basis via 6%, 7% of households continue to get that high%. most important element of having this contract in the event of a downturn like in 2008 would not have the amount of layoffs today. the gdp will not have to follow steeply as it did. they then do not go as long as they typically are. you look at historical recession, the forecast recession turns out to be higher debt. it under covers this important fact that the private debt in particular tends to forecast deeper and longer recession. we really need to think about why that is the case and then when you think of the solution one has to have better sharing to focus on. >> is it politically feasible? >> it is practically feasible. >> i have spoken to people in the private sector. they clearly demand for the private sector in this kind of a contract the lender is in the venture capitalist for example are willing to invest in this kind because this contract offers them certain very attractive features i heard he mentioned that gives them exposure to house prices in the housing market which they want to have. they want to have an upside to fewer long-term and the upside has certain risks. there is clearly demand as well but is there. we currently have biases in the system. that push in the wrong direction and may extend its contracts there are three main reasons. the way our tax system is today, we subsidize get because of the contracts. that is one important force in the wrong direction because it's in the interest of tax subsidy reason and the lenders as well to issue standards that as opposed to the kind of shared responsibility market i was talking about. we need to change the system of taxation. we need to tax differently, even if you make it revenue neutral. it should not be biasing the tax cuts for the creation of debt which has these similarly when it comes to the way we run capital banking sector, it is in the interest of the way they have the system right now to hold the standard market contract on the asset side because if it is a standard data, it is likely very very high. if they issued the insurance component to it it will be much higher for the same balance. delegates incentivize to issue the kind of market that is better for the system as a whole. when we talk about credential reservation, that will promote stability in the macro economy in the financial system. we need to incorporate their feedback in the work the negative consequences of the book. but currently the tax and regulatory regime incentivizes a system to push more than a debt to mention which is destructive in the long run. i haven't actually answered your question. i wanted to highlight first but practically it is feasible but we need to change the taxation aspects. politically one way to implement this is to be very straightforward or the case of the u.s. then he quickly mentioned that. we are to have a situation with the example. you have a situation where they buy a march is defined by the government. it's not like the government is out. and from the taxation but they instruct ability. to change the situation, the government cannot go in the right direction. currently there is a specific definition if the market satisfies those it gets a backing from the government entity. if they change the definition we will provide backing they are now defined differently they previously defined there. if that is the new conforming market and now the government is pushing the private sector to move in that direction with a better direction for my taste. the new conforming market will go in that direction and it will be in its neutral to stanch and yet it will remove this bias that tends to promote that they'll automatically be adjusted. those are some of the specific things that can be done. for any or all of these things to happen, decisions need to be made, which involve congress, which involve the white house and so on. having talked to some of the affairs, there is clearly an understanding these things are important. they understand the logic they agreed that this is the direction. we do live in this environment where things are very polarized. it is very difficult and things in washington and not lowers the prospects of doing this successfully. our position or our job is to argue on merit and to push this debate further in the public affairs to continue the conversation with the political side and the public discourse more generally to help understand the situation and try to highlight the key bottleneck system that is a source for positive change all the time. and at the end of the day we have to leave it in the hands of the politicians and the political parties that say this is what we think is in the public interest and at the end of the day they make the ultimate decisions. >> is homeownership a worthy goal? just go homeownership is a worthy goal but it should not be pushed and i'm hospitable manner. i own a home. i enjoy it. that is a decision i made and i would hope the same for others as well as i hope myself. it is a worthy goal. what can become an issue is if you push homeownership in an unsustainable way or in an artificial manager without understanding the fundamentals are going in the opposite direction. let me give one specific example. if you look at homeownership rate to 2008 there is a substantial homeownership up to 5% in the u.s. the kind of people who were getting home for the first time, it would've been wonderful if they were getting homeownership because the overall earning capacity was expanding. that was not the case. people who are actually buying for the first time into these homes, they are rapidly expanding. as we. as we know, in median income is in real terms than i was true for the 2000 as well. despite their real income the household bought out by more expensive houses. they didn't have the savings are the income to buy the entire house, so they were just able to borrow more and more analysis on the reason the homeownership increases. that is not a sustainable situation and literally the last people who bought a home for the first time did not have the financial capacity even for the first few months of living in that house and that really was the downturn of the housing market. homeownership just as one number that we try to ramp up as much as we can, that kind of policy can backfire. we need to look at the earning potential that we are trying to push into the homeownership. if it is a process that evolved because of higher earnings, it is a very good thing that we should not try to do it artificially by extending credit to people who cannot afford it. >> host: who is your co-author? >> she started working on these issues of housing mortgages and all of the macro economy. the timing was good because it started thinking about issues towards the end of 2006 before the crisis was started loading the data we need to do the analysis that is inside this. i remember in 2007 when the crisis started to appear, the whole system kind of crashed. we were already had the data to look at the issues that became relevant. in some sense they became lucky. it has been a tremendous opportunity to get the