By Bernice Napach
When the housing market collapsed four years ago, many economists and federal regulators blamed excessive leverage on Main Street and Wall Street for the crisis. Now, years later, the unwinding of that massive debt -- known as deleveraging --is slowing the economic recovery, says Mike Konczal, a fellow at the Roosevelt Institute, a left-leaning think tank.
"Mortgage debt is the real core problem" for the economy, Konczal told The Daily Ticker.
It's estimated that 23 percent to 31 percent of homeowners owe more debt than their homes are worth, said Konczal. Not surprisingly, many are trying to pay off that debt, leaving less money to spend on anything else, and that drop in demand is causing high unemployment. He calls it a "balance sheet recession."
Its origin lies with the doubling of household debt to $14 trillion between 2001 and 2007 as more and more households borrowed against the rising values of their homes. Then the housing market crashed, leaving homeowners today owing as much as $1.2 trillion more than their homes are currently worth. In the accompanying video, Konzcal said it's the paying down of that debt, not the negative wealth effect from depressed home prices nor tax policy, that has halted the recovery in housing and the broader economy. His solution is to stimulate demand through lower taxes, more aggressive Federal Reserve policy and government initiatives that would restructure household debt, including mass writedowns. He cites Iceland's foreclosure moratorium as an example of government support that helped households reduce debt.
"We do have choices," Konczal said. "The Fed, the FHA and Congress can do more….stimulating demand will ultimately cure the recession."