April 22 (Bloomberg) — “What a relief, Marge, not to have that huge mortgage payment hanging over our head anymore.”
“You can say that again, Harry. Let’s celebrate. Maybe take a nice vacation. Or buy a new car.”
“What if the bank forecloses on our house? We could be living on the street next year.”
“Exactly. Which is why we need a new car. Maybe something roomy like a Chevy Suburban.”
By now you’ve probably seen the analysis, if you can call it that, on how mortgage defaults are driving consumer spending.
Yes, you read that correctly. Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind — and money at retailers.
In an attempt to explain strong retail sales in the face of high unemployment, depressed consumer confidence and declining real incomes, Paul Jackson, publisher of HousingWire, alit on an idea that he conceded might sound far-fetched: “People are spending their mortgages,” he opined in an April 5 column.
Because the consequences of missing a mortgage payment are so far in the future, thanks to the multitude of government assistance programs, consumers are behaving as if they’ve just been handed a free lunch, he said.
Other economists jumped on the bandwagon. Mark Zandi, chief economist at Moody’s Economy.com, told the Wall Street Journal this week that 5 million households aren’t making payments on their mortgages, giving them “as much as $60 billion to spend.”
Economists at Goldman Sachs Group Inc. came at it differently. In an attempt to explain how consumer spending exceeded their forecast, they acknowledged their “standard net worth model overstated savings” if households treated residential investment as just another form of consumer spending. Uh-huh.
Blogger Barry Ritholtz called the proponents of the defaults-are-good theory on the carpet, saying in an April 16 post that the analysis got it backward. “Those people voluntarily not paying their mortgages are not buying luxury goods, for the simple reason they cannot afford them,” Ritholtz wrote.
Maybe it’s my age or my upbringing, but I can’t imagine frittering away the interest payments on a delinquent mortgage when the sheriff might show up any day with an eviction notice.
Not everyone lives that way or acts rationally all of the time, the housing bubble being a case in point. After biting off more home than they could afford, consumers are more likely to compensate by being overly cautious. Once bitten, twice shy.
Just ask the banks, which, after an extended period of lax lending and big loan losses, tend to tighten credit standards to an extreme.
There’s an even bigger problem with the idea that mortgage defaults are driving consumer spending. When a homeowner misses a mortgage payment, “somebody’s not getting a payment” on the other side, said Thomas Lawler, founder and president of Lawler Housing and Economic Consulting in Leesburg, Virginia.
A mortgage lender or bank experiences reduced cash flow, which means less money flowing to shareholders who, the last time I checked, were consumers in their own right.
Sure, one can argue that the borrower has a greater propensity to consume than the lender, but this is a case of what Lawler calls “single-entry analysis for double-entry bookkeeping” and what I view as an example of Bastiat’s broken window. (See Bastiat, Frederic, “That Which is Seen and That Which is Unseen.”)
It’s like robbing Peter to pay Paul or, more applicable to the current situation, borrowing or taxing the public and calling it “fiscal stimulus.” There is no net gain from transferring spending power from one entity to the next.
Reductio Ad Absurdum
Lawler, a man after my own heart when it comes to carrying an idea to its logical conclusion, offered the following advice to President Barack Obama:
If you believe what the economy needs is a boost to spending, “forget the stupid stimulus,” he said. “Let’s get everyone to stop paying their mortgage.”
Why stop there? Instead of sticking it to renters, who tend to be less well-off than homeowners, Obama should make the plan fairer by spreading some of the wealth around. “Nobody has to pay,” Lawler said. “Let’s have a rent moratorium as well.”
Now there’s a stimulus plan that won’t cost the taxpayer a dime!
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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Last Updated: April 21, 2010 21:00 EDT