LA Times blames continued recession on the honest people paying off their underwater mortgages.

Yesterday the Los Angeles Times identified the true culprit in our continued recession.  All this time I thought it was Congress to blame for not passing a larger stimulus bill that would have included more aid to those out of work and more spending on our basic infrastructure of roads, bridges, mass transit and public schools.

Turns out I was wrong (thinly veiled sarcasm).  Turns out, at least according to La-La’s Land’s newspaper of record, that the recession would be over a lot sooner if all those honest people who continue to pay off their mortgage even though the mortgage is now worth more than the house would just stop it.  According to the article titled “Millions of homeowners keep paying on underwater mortgages,” those committed to meeting their contractual obligations are keeping money out of the economy that would otherwise be spent on consumer goods.  

Here’s how reporter Don Lee puts it:

“Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy.”

In simple English, the LA Times wants people to stop paying their mortgages so that they’ll have more money to spend on new cars, refrigerators, phones, flat-screen TVs, vacations and clothes, hopefully leveraging their new-found funds, which means not only spending the difference but also borrowing more.

Like most economists and economic reporters of all persuasions, Lee and the experts he quotes can only fathom one way to get out of the recession: spend more.  They fail to see that spending more only works out in the very short term, for two reasons:

  1. Sooner or later you have two choices only: either pay back the money, which will cripple a spending-induced economy or screw your creditors (meaning the American public, since the banks who loan the money will no doubt receive bailout assistance again).
  2. In the long run, an economy based on ever greater spending will consume resources and pollute the earth.

Some of my readers will remember the word “potlatch” from a college introductory course on anthropology.  It comes from the native American tribes in the Pacific Northwest.  According to Merriam-Webster’s, it means “a ceremonial feast or festival of the Indians of the northwest coast given for the display of wealth to validate or advance individual tribal position or social status and marked by the host’s lavish destruction of personal property and an ostentatious distribution of gifts that entails elaborate reciprocation.”  A potlatch is thus a mindless celebration of wastefully conspicuous consumption.  Preparing for these potlatches was a major economic driver in Indian societies.

We’ll never know for sure when potlatches would have depleted the resources of the Northwest tribes, because before it happened, European settlers arrived with diseases that reduced the population by 75%.  We do know that a potlatch of monumental building depleted the resources on the Pacific island of Rapa Nui and led directly to the total eradication of the population there.

We in the United States have developed a potlatch society and the only economic advice that most experts can offer for exiting the economic doldrums is to go on another potlatch.  But it just won’t work anymore.

2 comments on “LA Times blames continued recession on the honest people paying off their underwater mortgages.
  1. Dakota Redding says:

    Spare the rod and spoil the child

  2. yorkshire says:

    Excellent post – thanks. Really informative and straight to the point. Keep up the great work and I’ve subscribed to your RSS 🙂

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