A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance

22 Pages Posted: 25 Nov 2008 Last revised: 30 Aug 2010

See all articles by Casey B. Mulligan

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: November 2008

Abstract

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.

Suggested Citation

Mulligan, Casey B., A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance (November 2008). NBER Working Paper No. w14514. Available at SSRN: https://ssrn.com/abstract=1305520

Casey B. Mulligan (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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