Great Depression's lessons suggest worries for more 'strategic defaults'

on March 31, 2010 at 5:37 AM, updated March 31, 2010 at 5:46 AM

Casey B. Mulligan, an economics professor at the University of Chicago, writes on the NYT  Economix blog that a look back at the Great Depression suggests people will make their debt payments even when their income drops. But they tend to make "strategic defaults" if they have less incentive to keep up with the debt payments.

This study looks at consumer debt but similar concepts are at play in today's housing market where people who owe more on their home than it's worth have less incentive to paying off their debts.







Many people who lost their jobs in the 1930s still made their debt payments, as long as they had an incentive to do. Today homeowners with negative equity have little financial incentive to make their payments. By focusing so much on “affordability,” the Obama adminstration’s latest policies do little to prevent strategic default, and should not be expected to alleviate the foreclosure crisis.