MORATORIUM ON FORECLOSURES? BE CAREFUL ON THIS ONE!
DEPRESSION-ERA MOVE HAD NEGATIVE REPERCUSSIONS!
I'm far too young to remember The Great Depression and the 1930's. But I do remember high rates of inflation during the 1970's.
Richard Nixon, then President, attempted to stymie inflation with a couple of Price and Wage Freezes. But they didn't really work to the advantage of consumers.
Indeed, short-term price and wage freezes resulted in significant price increases after the freezes expired. Further, some manufacturers, seeing their profit margins curtailed somewhat, produced less in the short term, and that move exasperated catch-up increases later.
If we're not careful, the same thing can happen today, to those facing possible foreclosure on their home loans. Such a short-term foreclosure moratorium - President Elect Barack Obama and others have advocated a 90-day freeze on new foreclosure filings - could have a chilling effect on credit markets, with lenders seeing reduced chance of eventual payback on loans they write that go bad. It is possible higher interest rates and tighter lending standards can result - later on.
David E. Wheelock, an Economist with the Federal Reserve Bank of St. Louis, studied the moratoriums on farm loans that 27 U.S. states enacted during the Great Depression. Subsequent lifting of the foreclosure moratoriums resulted in lending rates "significantly higher" than before the freeze, and mortgage money was harder to come by. (Wheelock studied farm loans, since data on home mortgages during the 1930's was not complete or detailed.)
Said Wheelock, “When you bailout borrowers under one circumstance that will have costs on future borrowers.” Lenders in the Depression Era demanded a premium on loans they subsequently made - putting a big crimp in further recovery efforts.
Will there be a similar negative effect if such a moratorium enacted early next year? Perhaps not, but such an action would have to be structured properly to avoid such risk.
For more info and insight, see Michael Corkery's post in the Wall Street Journal Development Blog from Tuesday, November 4th.
DEAN MOSS & DEAN'S TEAM CHICAGO
