>they will chastened, to be sure, but their income which previously went to pay for debt service is now available for consumption.>
Will that be really turn out that nice? Let us say the average borrower has $200,000 in mortgage loan and $100,000 of investable assets (the borrower is also a lender). If the borrower walks away from his home, the lenders lose $100,000 or so, the borrower loses the $40000 equity he had put into the house. The banks will of course pass their losses to their depositors and other investors including the federal govt. The borrower's $100,000 of investable assets will lose their value by maybe $50,000 (there is less cash in the market to buy those assets, and the borrower is also a lender/investor). If the federal govt prints excess money to save banks, they devalue the borrower's remaining cash assets.
The only consolation is housing becomes affordable, but there are fewer jobs around. If the borrower has a job, his income will have more buying power, but his asset account would have been downsized considerably.
-Arun |
