Scott Sumner on Martin Feldstein on mortgage debt

During the Great Depression prices fell by about 25%.  You might think that a deflation that bad would convince even the most hard-hearted conservative that monetary stimulus was needed.  Not so, conservatives were horrified by FDR’s attempt to reflate, even though the price level remained far below 1929 levels for the rest of the 1930s. ….

If we’ve got a demand problem, why not simply have a bit more demand, and leave the free market system in place?  I just don’t get it.  What is it about demand deficiencies that makes people become unglued? ….

I thought of the Great Depression when I read this essay by Martin Feldstein:

HOMES are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away.

Gee, I can’t imagine why someone who lives frugally would be resentful of seeing an affluent neighbor with a good job use his house like an ATM machine, with one re-fi after another to buy boats and fancy vacations, and then dump his mortgage on the taxpayer, even though he could afford to pay it, just because his house was underwater.  Why would anyone have a problem with that?

Scott Sumner, “Martin Feldstein and Francisco de Goya“, The Money Illusion, 13 October 2011.

Scott Sumner, a political conservative and ‘market monetarist’, teaches economics at Bentley University in Waltham, Massachusetts. Harvard economist Martin Feldstein was chairman of the Council of Economic Advisers and chief economic advisor to President Ronald Reagan from 1982 to 1984.

Update: See the excellent exchange of views between Nick Rowe and ‘John’ on this post at The Money Illusion.

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