Caroline Baum takes apart the mortgage default driving the economy meme, calling it “nonsense”:
“There’s an even bigger problem with the idea that mortgage defaults are driving consumer spending. When a homeowner misses a mortgage payment, “somebody’s not getting a payment” on the other side, said Thomas Lawler, founder and president of Lawler Housing and Economic Consulting in Leesburg, Virginia.
A mortgage lender or bank experiences reduced cash flow, which means less money flowing to shareholders who, the last time I checked, were consumers in their own right.
Sure, one can argue that the borrower has a greater propensity to consume than the lender, but this is a case of what Lawler calls “single-entry analysis for double-entry bookkeeping” and what I view as an example of Bastiat’s broken window. (See Bastiat, Frederic, “That Which is Seen and That Which is Unseen.”)
It’s like robbing Peter to pay Paul or, more applicable to the current situation, borrowing or taxing the public and calling it “fiscal stimulus.” There is no net gain from transferring spending power from one entity to the next.”
If we really want to drive the economy, opines Baum, we should waive all mortgages and rent obligations! That would really goose consumer spending!
Honey, I Lost the House. Now It’s Time to Party
BusinessWeek, April 22, 2010