Commentary
The Huffington Post recently published an essay optimistically titled “How to Fix the Great Real Estate After-Bubble.” The “fix” proposed by Mary Manning Cleveland, a professor of environmental economics at Columbia University, is to get Congress to force banks to write down the principal balances on millions of underwater mortgages to their post-bubble market values.
This “fix,” unfortunately, ignores a critical question: Where would the estimated $2 to $3 trillion cost of the program come from?
The answer is overlooked because there is no easy answer.
Make no mistake: The government and banks have collaborated in a major game of extend and pretend to favour the banks at the expense of homeowners and taxpayers. The problem with Manning Cleveland’s proposal is that the financial system, and perhaps even the dollar, might not survive if it were enacted. It’s not about the proposal setting a “bad precedent” if it comes to pass; it’s about survival. It should be clear by now that our government is more concerned about the survival of the “too-big-to-fail” banks than it is about the millions of homeowners who remain mired in debt while the taxpayer shoulders the bills for massive bank bailouts.
Finally, the rule of law in the United States makes it a global safe haven for investment capital. Suppose a mortgage product existed whose terms state that if home values fall below the amount owed anytime over the next 30 years, borrowers get a windfall. What lenders in their right mind, other than the government, would agree to such terms?
Know that I do blame the banks and flawed government policies for the housing bubble. But I don’t blame pension funds and taxpayers who now hold the debt the article proposes to forgive. If we want solutions that make sense, we’re going to have to get real and give up the fairytale that we can wave a magic wand and conjure up trillions of dollars in debt forgiveness without unintended consequences.
Madeline Schnapp
Director of Economic Research
PropertyRadar.com
530-550-8801 x27
