Tuesday, March 10, 2009

Shanty Towns

As foreclosures continue to devastate communities, and unemployment mounts, it seems like more stories like this one from the Today show about the rise of shanty towns - or Bushvilles - in Sacramento, Seattle, Reno, and Nashville will become more commonplace.

Any governor who has threatened to reject any stimulus money, particularly extended unemployment benefits, should be forced to go visit these encampments.

Now what can we do to prevent these settlements from exploding in size? Creating jobs is the obvious first step. Hopefully, the stimulus and the benefits aimed at the most at risk within society will help. But we also need debt reduction for insolvent households, primarily by writing down the face value of mortgages to reflect current prices. With so many borrowers underwater on their mortgage - and many more likely to find themselves there over the next few years, as housing prices most likely still have 20-30% to fall - there will be a terrible incentive to do jingle mail, and simply walk away. This will cause housing prices to overshoot on the downside. Reducing mortgage debt will not only mitigate foreclosures, but boost aggregate demand. Nouriel Roubini has long called for a reincarnation of the HOLC of the Great Depression to buy up mortgages, in order to refinance/renegotiate the terms. Roubini elaborated on this point on CNBC yesterday.

Why can't we find a job in the Treasury department for Roubini? And Krugman, Stiglitz, Shiller, and Simon Johnson as well, for that matter?


  1. Prevention of Bushville Shantytowns

    Dean Baker has suggested a law providing that homeowers [not a typo] who are foreclosed on have the right to stay in the house if they pay market rent. The downside for the former lender/current owner - they can't sell it to someone else. But the upside is they get its fair value as a rental property. The upside for the neighborhood and for society in general is obvious.

    Of course, there are still going to be people who can't pay the rent (both among current renters and those falling into foreclosure), so other measures are necessary as well.

  2. I've seen Dean Baker's idea about letting homeowners about to foreclosed on rent instead. I meant to include it but forgot. It's a good idea. His main thrust was that it would give homeowners so much leverage over banks, who would hate to have renters, that the banks would likely renegotiate mortgages down to present day value.

    Eventually we're going to have to have across the board principal writedowns. Maybe Rick Santelli will do us all a favor and have a heart attack when he hears it so we don't have to listen to his self-righteous whining.



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