The central cause of the current recession (or maybe depression) wasÂ the overextension of credit, especially in the housing sector. So, how do you get out of that kind of jam? Foreclosures and time. Those that can’t afford their homes will have to lose them, and the banks will get back as much as they can, allowing their balance sheets to be repaired up to a point. Those that can afford their houses will just have to stop taking on more debt, and begin the process of paying off the principle to the point where the loan is rightside up. This will eventually lead to healthy bank balance sheets, and thus the resumption of normal (but hopefully not excessive) lending that will get industry moving again.
If you really wanted to screw with the country, what would be the worst thing you could do? Halt foreclosures and/or slow down the repayment of debt. And yet that’s exactly what Arnold “I am here from the future to destroy your economy”Â SchwarzeneggerÂ has just proposed. He has asked that state lawmakers impose a 90 day moratorium on foreclosures. That sounds really good, but another way of saying it is that it’s a three month state imposed time window wherein banks will not be able to repair their balance sheets. Given that California is ground zero for the housing bubble, this is pretty significant, and in my amateur opinion is tantamount to extending the recession by at least three months. It’s also a slippery slope, and given that it’s highly unlikely a farm hand living in a $750k house (yes, true anecdote) will be able to suddenly improve his cash flow in 90 days in the middle of a recession, I can’t imagine the moratorium will do anything besides delay the day of reckoning.
It would also be the height of selfishness for Californians to use the power of their state government to clog up the nation’s financial system in order toÂ avoid having to deal with the consequences of their feckless consumerism. Where California goes, so goes the country, and that includes really bad ideas. I expect other states, such as Nevada, to follow suit with similar populist legislation. Hopefully the Feds will clamp down before this gets out of hand, because otherwise I can see economically illiterate do-gooder state legislators launching the mother of all depressions by bringing down our entire financial system through a morass of legislation designed to prevent banks from clearing bad credit.
Why is foreclosure considered such an anathema, anyway, at least compared to the prospect of having our entire financial system collapse? People will be released of their debt burden, with the only consequence for their foolishness being that for the next seven years they’ll have to rent an apartment at a much cheaper monthly payment than they had before. I can’t imagine that’s such a bad thing, especially when the alternative is for the credit crunch to deepen, an outcome that would have potentially dire consequences for everybody. Given that the Fed has been only marginally successful in freeing credit markets, the last thing we need is for states to push the other way by obstructing the neccesary process of clearing out bad debt through default.