One of my quirks is a strange (some might say masochistic) interest in economics, famously known as “the dismal science”.

I probably spend more time reading about it than is either necessary or sensible. But if there’s one thing I would say everyone should look at, it’s last Friday’s book review by Larry Summers of ‘House of Debt’ by Atif Mian and Amir Sufi, two leading academic economists. When Larry Summers says it ‘could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession’, it’s probably worth paying attention.

This is despite the book being at times sharply critical of the response to the crisis by the US administration in which he worked. As well as forming a neat precis of the book’s main arguments, his review blasts the criticisms as being naive to the political climate in which the decisions were made. I think there may be a level of wounded pride and oversensitivity here; the bits of the book I’m moving on to now seem to acknowledge the political constraints pretty explicitly.

If you have time, it is well worth reading the book itself. I’m most of the way through it; it is a fantastically clear exposition of the economic causes of the recent financial crisis and recession, and presents some important original research.

Tim Geithner’s book ‘Stress Test’, by contrast, provides a great background to the political aspects of the crisis. A career technocrat rather than an economist, Geithner was nevertheless at the centre of both the Bush and Obama administrations’ response to the crisis, and therefore offers a unique take on what it felt like to be there. It does a fantastic job at conveying the sheer terror and feeling of helplessness he felt at times. It also gives a good insight to what it must be like to work with Larry Summers, which sounds … um … bruising: people skills are clearly not his forte! Towards the end, it does bang on a bit and would have benefited from being half the length, but it’s still worth a read.

One thing a combination of all of these writings has convinced me is that it was absolutely right to collectively hold our noses and save the banks during the crisis, despite the potential for moral hazard and the repugnance of ‘rewarding’ some truly atrocious behaviour. In fact, in the UK we were almost certainly too slow to do this, which is why we lost money - although not as much as most people think - from doing so. In the US, they were much more aggressive and the government quickly made money from their interventions as a result - something which has been frequently overlooked by those outraged by the entire banking profession.

What generally didn’t happen was any help for the people who over-borrowed. Mian and Sufi convincingly lay out why - although it would have felt equally as repugnant to some as rescuing the banks - it would have made sense to write down some of this debt or allow the terms to be renegotiated to be more favourable to borrowers. Geithner and Summers explain that the reasons for this were simply political. Legislating to do this while large sections of the population were (to mix metaphors) on their high horses wielding pitchforks was simply impossible.

This directly affected many people - including many who were basically responsible but unlucky with timing, as well as those who lied about their income on a self-certification mortgage / treated their home as a cash machine by remortgaging / took out 110% mortgages they couldn’t afford. Because of the feedback into the wider economy, it also indirectly affected everyone. The cheapest way of helping would have been to bail borrowers out or (if viable) induce high inflation, even though this would have benefited people who took debt they shouldn’t have done.

The net effect of not doing so has been to massively increase inequality across our society. The reason generation X and Y find it so difficult to get on the housing ladder, and why we’re all going to have to work longer and harder for a smaller pension, is because there was a massive relative wealth transfer from the poor to the rich in the crisis. That’s not just the ‘fat cat’ megarich - it’s to people who owned most of their houses and had some savings, which typically means the baby boomers. I won’t go into the details - read House of Debt for those - but it’s basically to do with the effects of debt and leverage and how this advantages different sets of people in a crisis. My wife and I have been lucky enough to have parents who were able and kind enough to give us some money to offset this effect and allow us to buy a house when we needed to, but something this important shouldn’t be left to individual circumstances.

Most of Mian and Sufi’s analysis concerns the US, but all of this is arguably even more important to the UK. In the US, borrowers can hand back a house (or have it repossessed) and walk away from negative equity, allowing them to start rebuilding their lives. In the UK, negative equity follows the borrower around even after repossession occurs, unless they go bankrupt with all of the consequences that incurs. While this is good for the banks, it’s awful for the wider economy, trapping people in their houses and causing massive pain for those affected.

Now that the horses and pitchforks have started to lower, we ought to think about adopting this aspect of the US mortgage system and on how we might be able to help borrowers as well as lenders in a future crisis.

If a UK party were to come up with sensible policy on this, they’d almost certainly get my vote at the next election. Alas, this is probably politically impossible - the granny vote would get hit by it, and they matter much more electorally than my demographic because they vote more.