One of the favorite complaints from this script is that we chose to bail out the "predatory" bankers instead of bailing out households. A favorite policy of this script is loan modifications. If only we had done loan modifications instead of bank bailouts.
I will forgive, for the sake of this post, the broader problem with this complaint, which is the fact that there have been numerous loan modification programs, aimed explicitly at erasing debts owed by households to the banks, while no program intended to help "Wall Street" or the banks was implemented with terms so deserving of the term "bailout" as that. Part of the complaint might be that those loan modification programs didn't amount to much. As the Survey of Consumer Finances data shows, they couldn't have amounted to much, at least with regard to being a source of redistribution.
Share of mortgages with principal balance exceeding estimated home value: 2009:Q4 Source: San Francisco Fed |
Here is a map from the San Francisco Fed that demonstrates the significant geographic influence on underwater mortgages. Even after accounting for the scale of mortgages held, by income groups, we should keep in mind that nationally, defaults have been strongly related to Loan to Value levels, which are much more related to geography than to income.
As a demand-side stimulus, this would amount to less than 1% of a single year's GDP, even if a full 10% of all mortgages outstanding to households in the bottom 60% of the income distribution were forgiven. And, remember, low income households are not highly leveraged, so this probably overstates the total.
Also, to the extent that more aggressive loan modifications would damaged bank balance sheets even further, this would pull down aggregate demand.
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