C.P. Chandrasekhar and Jayati Ghosh

Everyone knows the role played by housing bubbles in the pre-crisis booms that ended in spectacular crashes in the United States in 2008, as well as in other countries like the UK and Ireland, and then Spain. But many commentators still persist in seeing this as more of a developed economy problem, which is less likely to become a concern in developing countries where excess demand for housing remains an issue.

In fact, however, it is just as possible for debt-driven private consumption bubbles to burst in developing countries – and several developing country financial crises have resulted from precisely that in the past. The experience of the Asian financial crisis in 1997-98, in which excess private indebtedness played a big role in causing the crisis in South Korea and Thailand, had provided a salutary lesson to most of developing Asia in the subsequent decade.

So it could have been expected that allowing excessive private credit expansion, especially for private retail credit for housing, automobiles and other consumption, is something that would be anathema to Asian countries, especially those that had already gone through one round of devastating financial crises. Yet, in the aftermath of the Great Recession of 2008, many Asian developing countries actually encouraged the growth of consumer credit bubbles as a means to more rapid recovery, accentuating a process that had already been eased by financial liberalisation from 1999 onwards.

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Gerald Epstein

Among the critical problems that were pushed aside by the “fiscal cliff” negotiations between President Obama and Congressional Republicans, none are more pressing – or more intertwined– than the criminally high rate of unemployment still plaguing the country and the massive debt overhang faced by underwater homeowners.

While President Obama, the House Republicans and billionaire-financed conservative pundits, economists and “think” tanks shriek about unsustainable debt and deficits, official unemployment languishes at 7.8% percent, while millions of Americans are struggling with underwater mortgages and many are facing foreclosure. We confront this perverse set of priorities despite the fact that, as Robert Pollin has repeatedly pointed out, U.S. government interest payments on public debt as a share of federal outlays is at an extremely low level of 7.7%, about half the level as when Ronald Reagan was President.

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We are economists who think that the economy should serve the people, the planet and the future.

Four million families have lost their homes to foreclosure in the Great Recession. Today another four million or more face the same fate. This devastation was triggered by unscrupulous financiers and exacerbated by government policies that put banker bonuses ahead of homeowner solvency.

Some blame families for foolishly pursuing the American Dream of homeownership. They think government assistance for banks is OK, but homeowners should be left to take free-market medicine.

Some claim that the solution for the housing crisis is to extend and pretend, to perpetuate make-believe values on bank balance sheets rather than to modify principal based on real housing prices. These policies may be a dream for bankers, but they’re a nightmare for homeowners.

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