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Tuesday, November 18, 2008

Two From Feldstein

I was kind of disappointed that Martin Feldstein didn't complete the hat trick by also getting an op-ed into the NY Times:

A Chapter For Detroit To Open, by Martin Feldstein, Commentary, Washington Post: The Big Three U.S. automakers need more than an injection of $25 billion from the federal government. Because of their ongoing losses, they would burn through that money in less than a year and would soon be back for more.

General Motors, Ford and Chrysler can make excellent cars, but they cannot sell them at prices that are competitive... The basic reason is the labor costs imposed by union contracts. ... And the health-care costs of current workers and retired union members are an enormous additional burden.

The simplest solution is ... bankruptcy. ... The bankruptcy court could require the unions to rewrite contracts... The firms' bondholders and other creditors would have to take losses. ... The claim that bankruptcy would mean the loss of millions of jobs is nonsense intended to scare the public and force legislators and the Bush administration to throw money at the auto industry's problems. ...

The goal should be to put the companies on a course that will allow them to survive for the long term... Administering bitter medicine is difficult for politicians. President Bush would do his successor a favor by forcing such a restructuring. It would relieve Obama of his promise to help the auto companies and in a way that improves prospects for the American automobile industry.

And:

How to Help People Whose Home Values Are Underwater, by Martin Feldstein, Commentary, Wall Street Journal: More than 12 million homeowners now have mortgage debt that exceeds the value of their homes. These negative-equity homeowners have an incentive to default because mortgages are generally "no recourse" loans. ... As a result, mortgage default rates are now rising rapidly and are expected to go much higher. ...

If house prices continue to fall at the current rate for the next 12 months, as experts generally expect, ... a very high fraction of negative-equity homeowners are likely to default. ... This is the primary cause of the dysfunctional credit markets. None of the existing proposals to help homeowners with negative equity would eliminate the incentive to default. ...

The key to preventing further defaults and foreclosures among current negative-equity homeowners is to shift those mortgages into loans with full recourse, allowing the creditor to take other property or a fraction of wages. ... Substituting a full-recourse loan requires the inducement of a substantial write-down in the outstanding loan balance. Creditors have an incentive to accept some write-down in exchange for the much greater security of a full-recourse loan. The government can bridge the gap between the maximum write-down that the creditor would accept and the minimum write-down that the homeowner requires to give up his current right to walk away from his debt. ...

With 12 million negative-equity homes and an average negative equity gap of $40,000, the total cost to the taxpayers of taking one-third of the losses would be no more than $156 billion. ...

The prospect of a downward spiral of house prices is the major risk facing financial institutions. It is also a primary source of the further falls in household wealth that will reduce consumer spending and depress the economy. Providing an incentive to shift the current negative-equity loans to full-recourse mortgages -- while also injecting mortgage-replacement loans to stabilize the current positive-equity mortgages -- should be Barack Obama's highest priority as he seeks to stabilize the economy.

    Posted by on Tuesday, November 18, 2008 at 12:15 AM in Economics, Financial System, Housing, Policy | Permalink  TrackBack (0)  Comments (37)

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