Strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and will continue to grow, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the bible that they would repay.
I’m deeply worried about what comes from here…We don’t really have a lot of role models” for a positive outcome. One can look to Japan, which is not a heart-warming story, he said, adding “the only other role model is the Great Depression, which was ended by a very large fiscal stimulus project called World War II.
—Paul Krugman, speaking at the AEA conference on Monday, January 4th
The economy’s growth in the second half of last year was driven by a strong fiscal stimulus, including not only federal spending and transfers but also special subsidies to car buyers and to first-time home buyers. Home buying was also stimulated by a sharp drop in mortgage rates. These forms of stimulus will be missing in 2010, creating a serious cloud over the near-term economic outlook..It will be difficult to have a robust recovery as long as the residential and commercial real-estate markets are depressed and local banks around the country restrict their lending…