Why the mortgage crisis is good in the longterm

I have written about the sub-prime mortgage crisis a few times. It is a fairly complex issue that touches on a large number of economic issues. The press seems to be primarily worried about the losses of big banks and secondarily concerned about the impact on individuals. These are both big concerns that must be part of any policy put forward.

Here is my feeling, banks and investors must feel the pain, but we cannot allow it to kill them. I am not saying that no financial institution should fail over this issue, but we should move to limit the damage to protect the overall economy. I think it is dangerous to do a complete bailout because it incentivizes bad behavior, but too many failures would damage our ability to recover.


On the individual side, we must take much the same approach. People that purchased homes that they could not afford cannot be let off the hook, they must feel some economic pain for their risky behavior. Having said that, we are talking about people and not institutions. People feel real pain and we should try to help where we can. I think a system should be put in place to facilitate the refinancing of homes that still have a value somewhere approximating the loan. This means that we should not extend refinancing to a home where we would loaning more than the actual value of the home. I think the refinancing help should go first (and perhaps only) to people with demonstrable income. Given that there will be large number of people left out, we should take steps to ease the transition of people who will lose their homes to foreclosure. Furthermore, there should be a method for people to refinance based on fraudulent activities by mortgage brokers.

The object in my mind is to avoid catastrophic economic damage and ease the societal instability of this sort of transition. By instability I mean the hopelessness and anger that will be experienced by many caught up in the process. There are few things in life more traumatic than losing one's home and this should never be far from the minds of the policy makers.

After the crisis is over, we need to think through how to change the systems, so that home ownership is achievable, but not without income and effort.

So, what is the silver lining here? Home prices... I think the inflation of home prices was ultimately bad for us as a society. Although my home has lost thousands of dollars in value, I am heartened by the idea that hard working people in Arizona will still have affordable housing available. Affordable housing is good for our economy...