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A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance

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Casey B. Mulligan

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14514.

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Date of creation: Nov 2008
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Handle: RePEc:nbr:nberwo:14514

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    Other versions:
  2. Edlin, Aaron S, 1993. "Is College Financial Aid Equitable and Efficient?," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 143-58, Spring. [Downloadable!] (restricted)
  3. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  4. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  5. Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January. [Downloadable!] (restricted)
  6. Casey Mulligan & Luke Threinen, 2008. "Market Responses to the Panic of 2008," NBER Working Papers 14446, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Casey B. Mulligan, 1998. "Pecuniary Incentives to Work in the United States during World War II," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1033-1077, October. [Downloadable!] (restricted)
  8. Dick, Andrew W. & Edlin, Aaron S., 1997. "The implicit taxes from college financial aid," Journal of Public Economics, Elsevier, vol. 65(3), pages 295-322, September. [Downloadable!] (restricted)
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  9. Sachs, Jeffrey D, 1990. "A Strategy for Efficient Debt Reduction," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 19-29, Winter. [Downloadable!] (restricted)
  10. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2002. "Markups, Gaps, and the Welfare Costs of Business Fluctuations," NBER Working Papers 8850, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Casey Mulligan, 2009. "What Caused the Recession of 2008? Hints from Labor Productivity," NBER Working Papers 14729, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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