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Home Publications Blogs Beat the Press The Fallout from the Housing Bubble in Spain

The Fallout from the Housing Bubble in Spain

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Thursday, 28 October 2010 04:43

The NYT had an excellent piece reporting on the debt burdens created by the collapse of the housing bubble in Spain. In Spain, unlike the U.S., mortgage debt typically follows the borrower even after they have lost their house. It is also very difficult to eliminate this debt through bankruptcy which means that many foreclosed homeowners will be saddled with mortgage debt until they die.

This is part of the reason that competent economists were concerned about housing bubbles in places like Spain. The European Central Bank (ECB), like the Fed, was not concerned. No one at the ECB lost their job, or even missed a promotion, as a result of its failure to take steps to counter the housing bubble in many euro zone countries.

It is also worth noting that debt has an effect on labor supply that is comparable to taxes. If a former homeowner knows that they will have to pay 20 percent of their income to a creditor then it reduces their incentive to work in the same way as if they had a 20 percentage point increase in their tax rate. This provides a powerful disincentive to work or an incentive to work off the books. The negative economic impact of harsh bankruptcy rules on economic output is rarely discussed.

Comments (7)Add Comment
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written by izzatzo, October 28, 2010 8:51
If a former homeowner knows that they will have to pay 20 percent of their income to a creditor then it reduces their incentive to work in the same way as if they had a 20 percentage point increase in their tax rate.


This reveals Dean Baker as the supply sider he really is. Abolish all debt and free resources to rise up and be employed free of tax and debt. It will pay for itself like any tax cut does. Forget about the collapsed demand thing. Replace it with a Moral Hazard Free Debt Program.
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written by Ellis, October 28, 2010 12:04
"No one at the ECB lost their job, or even missed a promotion, as a result of its failure to take steps to counter the housing bubble in many euro zone countries."

Maybe it's you, who got it wrong, Dean. I doubt that the purpose of the ECB -- or the Fed for that matter -- is to direct the economy, by guarding against bubbles. History shows that's just ridiculous. No, these institutions safeguard and support the profits of the big banking institutions. When banks make money off of speculative bubbles, the ECB helps them do that, and so does the Fed. And when the bubbles crash, the ECB, like the Fed, shovels bucketfuls of money into the banks' coffers -- as you have pointed out so eloquently many times. In that regard, the policies of the ECB and the Fed's have been a success. That is why no one there has lost their jobs. What's more, Wall Street is expected to pay out 144 billion smackers in bonuses this year. Who cares if the rest of the world is taking a dive? Nothing else matters but the profits of the banks and other big financial institutions.
Correction, it decreases their incentive to work in the taxed economy.
written by floccina, October 28, 2010 4:22
If a former homeowner knows that they will have to pay 20 percent of their income to a creditor then it reduces their incentive to work in the same way as if they had a 20 percentage point increase in their tax rate.


Correction, it decreases their incentive to work in the taxed economy. Most able bodied people will work no matter what. They can work for cash and not report it as income or they can produce goods and services for in family consumption.

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It's Biblical. Every twenty five years all debts are forgiven. That's what the Jews lived by and they made out OK, Yehthatso.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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