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Debt Relief and Economic Recovery

“If You Want a Quick Recovery, Forgive Debts,”

by Tomasz Piskorski and Amit Seru

If you’re hoping for a quick recovery from the Covid-19-driven economic collapse, we’ve got good news and bad news. The good news is that we’ve studied the Great Recession and singled out a crucial factor in how fast the economy can recover: debt relief. The bad news is that, right now, Washington isn’t taking serious action to give people a break on their mortgage and rent payments, student debt, and auto loans.

This crisis did not start in the household sector, but the problems faced by households are similar to 2008. The record 16.8 million new jobless claims already filed have mortgage lenders preparing for the biggest wave of delinquencies in history. By our estimates, more than 30% of all borrowers could default on their mortgage, about 1.5 times the level of defaults during the 2008 crisis. As we learned in that recession, the pain of defaults does not stop with the borrower: The damage creates ripple effects that slow down the economy. Ruined credit scores make it harder for borrowers to get future loans, foreclosed homes fall in value and bring down neighborhood property values, and cities suffer when borrowers have less to spend at local restaurants and businesses.

Washington has to move quickly—right now—because we know from the Great Recession that how we handle debt relief today will critically determine the speed of the recovery. Swift action can prevent the imminent surge of mortgage defaults from spiraling into a prolonged recession. 

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