The Distribution of Households’ Balance Sheets and the Recovery

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I want to point out this post from the LA Times, The consumer isn’t overleveraged — the middle class is about a BofA Merrill report:

The report hammers home what you might already suspect: The consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class families’ spending power for perhaps years to come…

By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth. Those people should have ample spending power to help fuel an economic recovery.

What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets — stocks, bonds, etc. — which have mostly bounced back significantly this year.

I think the most sensible way to get through this debt is to have well designed mechanisms for writing down housing debt, where homeowners take a penalty and creditors get an excessively large claim on future housing price appreciation. Lien-stripping (“cramdown”) would have been the smartest way to do this and I hope that it will still be a possibility at some point in the future. Getting aggressive about the valuation of second-lien mortgages on the books of the largest banks would also be a good idea.

But regardless, extending the tax cuts for the richest 3% of American’s won’t help with the balance sheet overhang problem. Good for them but bad for policy options, they simply are doing too well to be hit by these concerns.