How home equity can be used to fight a recession. A U.S. case study

De Koning, Kees (2020): How home equity can be used to fight a recession. A U.S. case study.

Abstract

The corona virus occurrence has and will dramatically change the economic outlook for many countries in the world, including the one for the U.S. Not until a vaccine is produced and accepted as safe for users, will this threat continue to live on. Currently consumer preferences are rapidly changing, including avoiding local and international travel. Supply chains are and will also be seriously affected as some of the most important exporting countries, (China and South Korea) are bearing the brunt of the virus infections.

What has this to do with the subject of this paper: “How home equity can be used to fight a recession”. At first glance little, but as will be explained in the paper actually quite a lot.

The likely results of the corona virus in economic terms will be company closures and/or staff reductions, which will be reflected in reduced earnings, both for companies and individual households leading to higher unemployment levels.

Obligations on home mortgages will for quite a few households become a very heavy burden. Home mortgage obligations are currently not linked to income fluctuations, neither in the U.S., nor in any other country.

Secondly the concept of the “Bank of Mums and Dads” can only apply to households where the Mums and Dads are in a sound financial position themselves. The worldwide low interest rates and the expected reduction in pension payouts as a result of falling stock markets will reduce the scope for such financial assistance for many parents.

The proposals, as set out in this paper, directly links income levels with the ability to service mortgage debt.

The second and probably even more important element is to extend the concept of the “Bank of Mums and Dads” to a new government entity: “A Mortgage Debt Stability Fund” (MDSF).

The aim of the MDSF is to facilitate the temporary withdrawal of home equity as and when macro economic situations require it to do so. An MDSF helps fight recessions.

The currently applied system turns such home equity withdrawal into a loan rather than a cash withdrawal from personal bank accounts. The latter involves no charges. The MDSF can have the latter capacity. Federal Reserve funding to the MDSF (another form of QE) can act as the National Bank of Mums

• Item Type: MPRA Paper
• Language: English
• Keywords: Recession, home mortgages, home equity,corona virus, Mortgage Debt Stability Fund (MDSF)
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

References

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• De Koning, Kees: Inequality as a Source of Recessions and Poverty; https://mpra.ub.uni-muenchen.de/98684/1/MPRA_paper_98684.pdf