Investigating the Link between Debt, Deleveraging and the “Texas Miracle”

A lot of people are interested in the “Texas Miracle” – or the performance of the Texas economy during the Great Recession.  Matthew Shapiro has an epic post about the data, Jared Bernstein has two very important Keynes Goes to Texas posts (I, II) Kevin Drum and Jonathan Chait summarize.

There’s two debates – one is whether or not there is something there, and the other is what is causing it.  What is causing any job growth has important implications for our country.  President and CEO of the Federal Reserve Bank of Dallas Richard Fisher is now explaining that he is dissenting from the Federal Reserve because he is awe-inspired by the raw beauty of job creators in full motion in Texas (“And yet Texas, like all states, is subject to the same monetary policy as all the rest: We have the same interest rates and access to capital as the residents of any of the other 49 states, for the Federal Reserve conducts monetary policy and regulates financial institutions under its purview for the nation at large. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth”).

One important part of the crisis has to do with a debt overhang from the bubble and the subsequent process of deleveraging.  Suzy Khimm looked at this yesterday.  The Federal Reserve Bank of New York releases quarterly data (excel here) on of a handful of states and the country as a whole, getting specific in terms of debt and credit conditions.  I looked at this data source two quarters ago when we were discussing mobility and deleveraging, and now is a great time to check it again.

As we can see from their chart, there’s been a large buildup in debt and subsequent decline in that debt starting in 2008:

There’s a lot of states in there, so let’s take a few out and focus (you can do this by taking the excel file which has the raw graphs in there – thanks NY Fed!):

As we can see, Texas had very little in terms of a debt build-up and as such hasn’t experienced a significant decline in leverage since the recession.  The states we see with the strongest buildups and declines are states with the biggest housing bubbles.  These are the states with the highest unemployment as well.

Let’s plot the percentage of deleveraging versus the unemployment rate.  This is the percentage of decline in debt from Q2 2008 to Q2 2011 versus the June 2011 unemployment rate for the states in question above.

Texas (TX) is bolded above to give you a sense of how much it tracks expected unemployment given deleveraging.  It looks pretty much like where it is supposed to be.

(This relationship holds we take the difference in unemployment from June 2011 to June 2008 versus the difference in per-capita debt to keep both as changes.)

Deleveraging is very related to foreclosures.  In fact, a majority of deleveraging is happening through foreclosures, a costly and brutal way to delever the economy.

In an excellent paper (voxeu summary), Atif Mian, Amir Sufi and Francesco Trebbi correlated durable consumption growth and residential investment against foreclosures by state (which in turn is correlated with deleveraging), and Texas it looks to be pretty stable on the line.  Here’s an important graph with Texas pointed out:

Consumption growth and investments look on course given that foreclosures aren’t a big problem compared to the problem states.  To get a sense of something needing an explanation, check out the durable consumption growth in DC – full employment for lobbyists! (What’s going on in OK?  That’s a miracle story from that graph.)

So what is going on?  Texas never had much of a housing bubble to begin with:

Fisher states that a free regulatory environment is causing this growth, but the rather strong regulations on the mortgage market and growth in the housing stock are more likely the factors in preventing the build-up of housing debt that in turn isn’t holding back the economy.  There are strong regulations on the housing market, especially in terms of housing equity loans that in turn make it harder to bid up values.

Second, the issue of deleveraging is complicated.  For one approach to the idea linking deleveraging and the economic crisis see Paul Krugman and Gauti Eggertsson’s paper, Debt, Deleveraging and the Liquidity Trap, with an informal summary at VoxEU.  Here is Noam Scheiber at New Republic article from last October, Handoff or Fumble?, talking about Richard Koo, another deleveraging theorist.

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8 Responses to Investigating the Link between Debt, Deleveraging and the “Texas Miracle”

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  2. David Beckworth says:


    The NY Fed blog reported awhile back that a significant amount of deleverging is not occuring through default. It wasn’t clear to me, though, from the post whether (1) deleveraging through default or (2) deleveraging through debt paydown and less borrwing was the most important. Your previous post shows evidence that it is mostly through (1), though the NY Fed post makes me question that.

  3. What about the role of Texas’s high property taxes in avoiding the housing bubble? Roughly 3% and with the home’s value re-assessed annually, compared to California’s ~1% and lack of re-assessment due to Prop 13. Even with teaser rates (such as 1% with a negative-amortization loan) the monthly outlay would much higher due to the property taxes and thus averse to speculation.

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  6. CarlOmunificent says:

    Add the above to another plus for Texas:

    Among all 50 states, Texas, which forms the bulk of the 11th Federal Reserve District (the Federal Reserve Bank of Dallas), enjoyed the biggest proportional increase (2.282-fold) in total federal spending received from 1998 ( to 2008 ( tab/sec10.pdf).

    Nevada and Arizona, both of which lie in the 12th Federal Reserve District (the Federal Reserve Bank of San Francisco) that includes California, were 2nd (2.281-fold) and 3rd (2.257-fold), respectively, in terms of proportional increase in total federal spending received from 1998 to 2008. California was 32nd (1.856-fold) in this regard.

    New York, which is the largest part of the 2nd Federal Reserve District (the Federal Reserve Bank of New York), ranked 45th in proportional increase (1.745-fold) in total federal spending received from 1998 to 2008.

    From a Keynesian perspective, then, it should not be surprising that a comparison of job growth among the Federal Reserve Districts shows the 11th performed best, and 2nd performed worst, and the 12th was about halfway between the extremes, as Dallas Federal Reserve chair Richard Fisher pointed out in a recent speech ( It could also be argued that credit for job growth in Texas should be given to federal spending, rather than to Governor Perry or any other popularly attributed cause.

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