Duncan Black notes that the crisis of households having “too much debt they can’t pay off” could be solved in much the same way we solved the crisis of banks having “too much debt they can’t pay off”: The government could pay off the debt, or write it down, or buy it up, or somehow give households a do-over, much as it did for the banks. One popular suggestion is to have Fannie Mae and Freddie Mac basically refinance everybody’s mortgage.
When I ask people who understand this stuff better than I do why we can’t do that, they say that one man’s dollar of debt is another man’s dollar of asset. So if you write down household debt, who’s taking the loss? If it’s the banks, then how much are they taking in losses? Will they collapse? Will lending freeze up? Because if either thing happens, then you have created a new problem, and it might be worse than the old problem.
But perhaps they can just pass the debt onto the government, and the government can make the banks whole. That seems basically right, but at that point, you’re talking about Congress spending trillions of dollars to get us out of the economic crisis, much of it to, omce again, plug holes in banks. And if you think they’re willing to do that, you have to ask whether you would prefer they do it by subsidizing housing debt or by building roads and bridges and giving people tax cuts, all of which hands people money to pay off their debts and some of which leaves us with useful new infrastructure. But that’s a moot conversation, as they’re not willing to do it.
It seems more plausible that the Federal Reserve could do it -- this is Black’s suggestion -- but Fed officials are resistant to act on that sort of a scale, in part because Congress would likely attack their independence, in part because they think they would freak out the markets and create a new problem, in part because the sort of people who serve on the Fed’s Open Markets Committee are very worried about inflation and not all that concerned about unemployment, and in part for other reasons that I don’t fully understand. I worry a bit about the sense in the blogosphere that the Federal Reserve has a gun full of silver bullets and they simply refuse to pull the trigger. I sort of think if it really was that easy, they would start firing -- but I’m fully convinced that they’re being less aggressive than they should be.
As a broader point, Black’s observation that we treated the banking crisis as a crisis that we needed to do anything and everything to stop and that we’re treating the unemployment crisis as a problem that we basically hope will work itself out is correct. And all the pragmatic explanations in the world don’t detract from how horribly unfair the situation is.