While everyone focuses on the pathetic, dangerous political theater of the fabricated debt ceiling crisis, here’s a crisis that is actually responsible for the stunted recovery. Bank of America has joined Citigroup, J.P. Morgan Chase and others in bulldozing homes to reduce the housing supply. It is the latest indication of how desperate things have become in the effort to clear the housing market of bad loans and excessive supply.
After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix. Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.
Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.
The situation is sufficiently bad that radical ideas are emerging. Among those under consideration: the federal government has floated becoming a massive landlord through Fannie and Freddie, renting the hundreds of thousands of foreclosed properties in the hands of the government. Liberal economists are proposing a massive and politically unlikely government-mandated write-down of non-performing household debt. Banks are quietly coming up with their own radical plans for writing down loans, though they are holding their fire until after the deal with the State AGs. It can’t happen soon enough.