Friday, November 23, 2012

Economists, Obama administration at odds over role of mortgage debt in recovery - The Washington Post

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. 


American Dreamer said...

From the "timeline" at

"2011—The housing boom and bust causes a massive
transfer of wealth from ordinary American families to the
banks — economists say roughly $6 trillion — mainly because
so many Americans have drained equity out of their homes.
In 1985, Americans owned nearly 70 percent of the total
value of the nation’s housing stock, the main anchor of
middle-class wealth. By 2011, the homeowners’ share had
plummeted to just under 40 percent and the banks now
owned the major share of U.S. housing."

Hedrick Smith
Who Stole The American Dream? (2012)

Anonymous said...

The lenders will not suffer quite the same. The federal government is not "helping", it is choosing sides - and it chose the side of the lenders some time ago. So the lenders don't suffer the same harsh consequences that the borrowers do. The lenders are emboldened to do the same as soon as they can because they need not worry about the consequences of failure.

In addition, there has been a deliberate corruption of information on the borrower side. They have been told, for example, that 'HOAs preserve property value' when few things could be further from the truth.