Column: Coping with the subprime crisis

I have a column in the FT this morning that discusses rival approaches to the subprime mess.

There may be little or nothing the authorities can do to arrest these forces, but politics will insist they try. For the moment, foreclosures are the focus of attention. Congress is considering changes to bankruptcy laws, making it harder for lenders to foreclose and allowing judges to write down mortgage principal as part of a bankruptcy proceeding. Mr Paulson is opposed: he says it would slow the flow of future lending. Moreover, this approach only discourages lenders from foreclosing. Increasingly, borrowers who owe more than their houses are worth are choosing to walk away from their debts.

They call it “jingle mail”: the borrower posts the keys to the lender. Social stigma, together with a self-interested regard for one’s credit status, has inhibited this in the past. But walking away seems to be catching on; it may soon be all the rage. If so, as house prices continue to fall – leaving as many as 20m in negative equity, on some estimates – the lenders’ losses could exceed even Mr Roubini’s estimates.

The line that “falling house prices are good for the economy – they help clear the market” is no doubt correct, but it will be difficult to sustain if anything like that worst-case scenario begins to unfold. Then the challenge will be to confine political action to measures that do relatively little harm, and to avoid palliatives that will only amplify the cycle of recklessness and remorse next time round.

This seemingly obvious point is widely ignored in Washington. The US already has what must be the world’s most generous fiscal dispensation for mortgage borrowers – uncapped tax relief for owner-occupiers, plus colossal “government sponsored entities” to guarantee loans, implicitly subsidise mortgage rates and promote securitisation. This fiscal regime created an environment in which you felt a fool unless you borrowed to the hilt – not just to buy your house but to keep your equity in it to a minimum, so as to liberate cash for other purposes.

This is the very root of the problem. Yet favoured responses to the subprime crisis on Capitol Hill include extensions of tax relief to poorer households (at present, it goes only to taxpayers who itemise their deductions), further vast expansions of the remit of, and resources potentially available to, the GSEs, and assorted new outright subsidies.

You can read the whole article here.

Presented by

The Blacksmith: A Short Film About Art Forged From Metal

"I'm exploiting the maximum of what you can ask a piece of metal to do."

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

Video

An Ingenious 360-Degree Time-Lapse

Watch the world become a cartoonishly small playground

Video

The Benefits of Living Alone on a Mountain

"You really have to love solitary time by yourself."

Video

The Rise of the Cat Tattoo

How a Brooklyn tattoo artist popularized the "cattoo"

More in Business

Just In