Cutting Checks Is Simpler Than Modifying Mortgages

Martin Feldstein is putting mortgage modifications back on the table, though with an initiative that Dean Baker says would entail “leaving millions of homeowners as near indentured servants.”

Whenever I hear these debt relief concepts, I always want to step back. The logistically simplest and intuitively fairest form of economic stimulus is to hand out checks for a flat amount to all Americans. The usual knock on this kind of stimulus initiative is that though it’s logistically simple, it has a low “multiplier” since many people will use the checks to save for the future or pay down existing debts. But if you’re in a situation where a problematic shortfall of aggregate demand is said to be exacerbated by specific debt issues, then this problem goes away. And as a stimulative strategy, I think handing out money completely dominates targeted mortgage modifications. For one thing, it doesn’t raise the same fairness and moral hazard issues. It’s also much simpler and easier to design and explain the program. On both the consumer side and the bank side, everyone ends up somewhat better off while maintaining the principle that people who made smarter/luckier borrowing/lending decisions should end up better situation than people who made worse/unluckier ones.

The only real issue here is whether the Federal Reserve will commit to keeping interest rates low as long as unemployment stays high even if increased spending results in transient increases in rent and gasoline prices. That, however, is an issue with any plan for economic recovery that doesn’t involve a magical discovery of a brand new post-scarcity energy technology.