John Quiggin: A million foreclosures

Posted by Kendall Harmon

The relatively generous treatment of debtors in the US seems to illustrate, at the national level, a pattern found among US states. Pro-debtor institutions are, in political terms, a substitute for redistributive taxation.

Where credit is easy, and the consequences of non-repayment are not too drastic, households can maintain consumption for long periods even when their income is falling. So, the political resistance to pro-rich policies is much less sharp. The massive increase in income inequality in the US since 1970 has coincided with an equally massive boom in consumer credit.

The obvious question is whether this political equilibrium can survive. We’ve already seen a tightening of bankruptcy laws in the US and a big shift away from fixed-rate loans. Almost certainly, in the wake of the current debacle, lenders will act to protect themselves from jingle mail by lending lower proportions of house value and demanding additional security.

Read it all and follow all his links.



Filed under: * Economics, PoliticsEconomyHousing/Real Estate Market

9 Comments
Posted January 31, 2008 at 8:55 am [Printer Friendly] [Print w/ comments]



1. Henry Greville wrote:

History shows that some things about a society’s economics do not change. A growth of true wealth results from either (1) the dangerous methods (exploitation of another society’s assets through either war and/or economic imperialism) and (2) the safer method (productivity that is rewarded by marketplace demand, followed by re-investment - of, remember this?, SAVINGS - in order for further productivity. Mere stimulation of marketplace demand by giving out unearned easy buying power through the advancement of debt obligations, meanwhile buying and selling debt obligations, makes short term profit only for the first few risk-takers, yet profit that is worth little in the long run due to the eventual inflation of prices coupled with practical, if not official, devaluation of a society’s currency and the cyclical shrinking of marketplace demand when debt obligations rise too high for repayment rates satisfactory for debt speculators.

January 31, 10:44 am | [comment link]
2. KAR wrote:

Almost certainly, in the wake of the current debacle, lenders will act to protect themselves from jingle mail by lending lower proportions of house value and demanding additional security.

Praise God!! Something they should have done eight years ago. I’m just sorry one had to loose $10B to learn this lesson.

January 31, 12:22 pm | [comment link]
3. John Wilkins wrote:

I would examine the Government’s investment in the economy right before, during and after WWII to look at our country’s growth in wealth.  Keynes generally had ti right.

January 31, 12:41 pm | [comment link]
4. Irenaeus wrote:

“The relatively generous treatment of debtors in the US seems to illustrate, at the national level, a pattern found among US states. Pro-debtor institutions are, in political terms, a substitute for redistributive taxation”

If so, then sometimes a very PECULIAR substitute. Think of the Texas homestead exemption, by which (as I recall) a wealthy deadbeat or fraudster can protect a home of ANY VALUE. I believe Florida and several other states also have homestead exemptions with no dollar limit.

By (redistributive) contrast, some such states let poor debtors keep little more than the clothes on their back.

January 31, 12:48 pm | [comment link]
5. Henry Greville wrote:

Re #3, Keynesian federal government policies were indeed right when the problem they addressed was the popularity of private hoarding and refusal to spend, etc. Priming the pump was necessary to get out of the no-growth cycle of the Great Depression, and, of course, WWII spending did much of the trick, as did wage and price controls, as long as they lasted, for the sake of rebuilding a mass psychology of economic normalcy. Saving in the hope of earning interest from the investment of one’s saving has never been the same as hoarding, however; saving through CDs, money market funds, and mutual fund investments, is the kind of moderate pump-priming that a majority of Americans can do, and that many more should who have instead been incurring unreasonable consumer and mortgage debt - thus inflating the bubble that seems to have burst in 2007 only to release a lot of hot air (in the form of angry screaming).

January 31, 2:39 pm | [comment link]
6. TWilson wrote:

The Income Inequality Two-Step has always bothered me. Step One: find an egregious stat that shows how a small fraction of the people (the rich) are becoming better off. Step Two: Enact policies that hurt ten-times as many people. I am not among the former group, but I tend to end up in the latter.

Also, does anyone else find it disturbing how articles such as these treat people as mere functions of their environment: the rich are made richer; the poor respond senselessly to demand stimuli; the aspiring middle class stretch and shackle themselves with hopeless debt.  I know individuals in each of these classes, and some have made good decisions, and some have not. Some of these issues have structural components, but we cannot ignore the individual moral/prudential component.

January 31, 3:03 pm | [comment link]
7. Sick & Tired of Nuance wrote:

The rich rules over the poor,
      And the borrower becomes the lender’s slave.
Proverbs 22:7 (NASB)

If I am a lender and I offer easy credit, am I not enticing people to become my slaves?  This usury is a reproach.  We are rapidly becoming a nation of wage slaves, living paycheck to paycheck.  The Federal Reserve did exactly the wrong thing by cutting interest rates.  We can all look forward to spiraling inflation now, increased speculation, and continued lending practices that enslave people.

February 1, 3:17 pm | [comment link]
8. Little Cabbage wrote:

John Wilkins, you hit the nail on the head in #3 above.  Thanks for the post!

February 1, 8:37 pm | [comment link]
9. John Wilkins wrote:

tx little cabbage.

There is a lot of mystery to economics - I tend to have Georgian (Henry George, that is) sympathies:  the labor of one’s personal work should not be taxed, but there should a general rent that pays for the public use of services that is universal.  The wealthy require (because they have lots of money) a lot more protection:  their money is only as good as the value the citizenry place on it and the government protects it.  Laws generally protect property; they enuse that the walthy can trade among each other without fear of being scammed or retribution.  These laws also protect the poor; but the wealthy have much more to lose. 

I believe in the freedom of trade.  I also believe in the freedom to organize (via corporations or unions).  The government’s role is to protect us from little monarchies, and to discourage patterns of cheating and lying that arise when a few have all the money and others have none.  One credible way is to ahve a very severe inheritance tax.  This discourages people from becoming lazy - and besides, they would have had lots of great opportunities before hand.  And the money should be used to allow for the equal start that would benefit a free society.

February 3, 3:01 pm | [comment link]
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