Roubini, Zandi: Mortgage defaults as economic therapy
Mark Zandi, chief economist and co-founder of Moody's Economy.com, and President Obama at a fiscal responsibility summit in 2009.
(Photo Credit: Bill O'Leary/The Washington Post)
By Howard Schneider
Top economists Nouriel Roubini and Mark Zandi took the stage at an International Monetary Fund conference room on Friday and presented a novel spin on the mortgage defaults still plaguing the home industry: they may be "therapeutic." Instead of letting the housing market continue to bleed out slowly for years to come, they should be accelerated so that home prices and household equity can start to recover, Roubini and Zandi said..
The banks "can digest it," after a period in which the major financial institutions have raised new capital and strengthened their balance sheets, said Zandi, head of Moody's Analytics.
Roubini went further, proposing a massive, nationwide mortgage writedown instead of clogging bank offices and bankruptcy courts with case by case renegotiations.
The U.S. economy, Roubini said, won't recover until households unburden themselves from excessive mortgage debt. Roubini's suggestion: get it over with in one fell swoop that would lower overall household debt to a reasonable level, free up cash currently going to mortgage payments, and put families on a more secure financial footing. Banks could even be protected, to some degree, by warrants that would give them a share of the profit in any eventual sale -- essentially a forced conversion of mortgage debt into equity.
It was a bit of a repeat performance at the IMF for Roubini, who on the same stage in 2006 said the U.S. was heading for a "hard landing" that would drag the world down with it.
There was not much good news Friday from "Dr. Doom."
The probability of a double dip recession? Forty percent and rising, he said.
Key risks? Not only do households need to shed debt, but Greece, perhaps Ireland, and eventually other countries are heading for a default and there are fewer and fewer tools to pick up the pieces. Between the various bailout programs and other measures around the world, Roubini said, debt and losses have been first socialized onto government books, and then "supernationalized" onto the books of the IMF and the European Union.
If another calamity hits, "there won't be someone from Mars coming to bail out the IMF or the EU."
September 17, 2010; 4:57 PM ET
Categories: International Monetary Fund
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