Bubbles, economist Charles Kindleberger once said, can’t exist without borrowing. His 1978 masterwork—Manias, Panics, and Crashes: A History of Financial Crises—dissected famous fiascoes. Looking at the Dutch tulip bubble of the 17th century, he showed that vendor financing pumped up tulip mania: The people who sold bulbs at inflated prices provided loans to the greater fools who bought them. We will never know what Kindleberger would have made of the 2000s housing bubble and the bust that briefly shaved $10 trillion off U.S. households’ net worth. But there is a hint in a Wall Street Journal profile published in 2002, the year before he died of a stroke at 92. “The object of his greatest fascination today is the real-estate market,” the Journal reported. “For weeks, Mr. Kindleberger has been cutting out newspaper clippings that hint at a bubble in the housing market, most notably on the West Coast.”
Kindleberger is identified as “a giant in economics” in a new book by Atif Mian and Amir Sufi called House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It From Happening Again. The lesson they draw from the long-time Massachusetts Institute of Technology economist is centuries old but almost deliberately forgotten. “Economic disasters are almost always preceded by a large increase in household debt.” To prevent the next disaster, they say, society should change the terms of debt contracts to make them more flexible and hence less harmful.