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Harvard’s Feldstein: Government Must Forgive Underwater Home Loans

Thursday, 13 Oct 2011 11:45 AM

The government must make a bold move to forgive the debts of millions of mortgage borrowers or face a very long and painful economic decline, warns former Reagan adviser and Harvard economist Martin Feldstein.

In a New York Times Op-Ed, Feldstein points out that the “housing wealth” of Americans already has fallen by $9 trillion, close to 40 percent. In just the 12 months ending June, it fell by $1 trillion.

The decline in the perceived value of that financial backstop — our biggest investment by far is our homes — has put the brakes on everything in the economy, Feldstein contends.
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Until we fix housing, there is no exit, he writes.

“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,” Feldstein says.

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Martin Feldstein
(Associated Press photo)
Feldstein proposes that the government reduce mortgage principal in “underwater” cases where the number exceeds 110 percent of a home’s value.

He calculates that it would cost less than $350 billion and could be split evenly between the banks and the federally backed lending agencies.

The decision would be voluntary, but if the homeowner agreed and then defaulted the lender would have recourse to his or her other assets. As it is now, the bank can only take back the house, not any other money or investments the borrower might hold.

“Failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession,” Feldstein writes.

That recession might already be here. The latest UCLA Anderson measurement of trucking activity shows another steep decline.

The September reading of the Ceridian-UCLA Pulse of Commerce Index slipped by nearly a full point in the month from August, which itself saw a 1.4 percent drop. The index tracks diesel purchases at 7,000 truck stops nationwide.

Judging from the past few months, trucking activity has been declining at an annualized rate of 10 percent per year, remarked Ed Leamer, chief economist of the index.

“That’s a huge rate. That’s a rate that is symptomatic of a recession,” Leamer said.

“If you go back to the historical data since 1999, we’ve never had such a big number like this outside of a recession. We’ve come close, one time, but otherwise this is a recession-level number.”

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The government must make a bold move to forgive the debts of millions of mortgage borrowers or face a very long and painful economic decline, warns former Reagan adviser and Harvard economist Martin Feldstein. In a New York Times Op-Ed, Feldstein points out that the ...
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2011-45-13
Thursday, 13 Oct 2011 11:45 AM
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