NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance

Casey B. Mulligan

NBER Working Paper No. 14514
Issued in November 2008
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics, Public Economics

When asset values fall, the owners of collateralized loans are not in an enviable position. Nonetheless, they possess a kind of monopoly power over their borrowers that they do not possess when borrowers are solvent. Lenders maximize profits by price discriminating, but create deadweight costs in the process. From the perspective of the aggregate labor market, it is as if lenders were levying their own labor income tax, on top of the taxes already levied by public treasuries. Governments have an incentive to regulate this price discrimination, repudiate part of the private debts, cut their own tax rates, or acquire the debt themselves. These conditions may describe both the 1930s and economic events today.

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Document Object Identifier (DOI): 10.3386/w14514

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