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.