Economists, Obama administration at odds over role of mortgage debt in recovery - The Washington Post
“No one was in doubt that debt overhangs were an important problem,” Summers said recently at a conference. But despite exploring many proposals, the administration did not see a plan that did not have the potential to cause “effects worse than the cure,” he said, such as cratering the financial system by forcing banks to absorb huge losses.
At a more basic level, officials simply did not believe that a big program of debt forgiveness was a smart investment, costing hundreds of billions of dollars — money that it preferred to spend on a massive economic stimulus package that could much more quickly lift the economy. The administration also announced a more modest program designed to avert foreclosures by reducing mortgage payments but not the total debt balance.
The underlying policy issue here is whether it's good policy and precedent to erase debt that fueled an asset bubble, in this case residential real estate. I don't believe it is. People all too easily forget the beating the economy takes when debt driven asset bubbles pop. The debt overhang is a harsh consequence but a necessary market object lesson for both lenders and borrowers.