Monday, June 9, 2014

Larry Summers Reviews "House Of Debt"

The House of Debt was warmly reviewed by Larry Summers because it illustrated the harmful effect of rising household debt on the recovery from the Great Recession.  Over leveraged households reduced their consumption and that has been a more significant factor in the recovery than the ability or willingness of banks to make loans.  Summers agrees with that point, but most of his review was used to justify the response of the administration to that problem.  In essence, the administration introduced programs which did little to reduce the mortgage debt burden faced by over leveraged households, even though many, including Summers, realized that it would have an impact on the recovery.

There were many reasons, offered by Summers, for not introducing programs that would enable households to use the bankruptcy process to reduce the principle on their mortgage debt.  He argues that it would have impossible to get the votes needed to pass the necessary legislation.  He recognizes that this would have required troubled banks to take write downs of the mortgage debt. that might have made it more difficult to prevent their collapse, but he argues that other factors were more important.  He cites regulatory issues, legal issues and implementation problems as the major reasons for ignoring that option.  This article, provides an analysis of Summer's defense.

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