How debt mercy helps drive US recovery

Debt 'deleveraging' in the US since the Great Recession has helped put many people and companies back on their feet. As painful as a bankruptcy or foreclosure may be, the US excels at giving second chances.

AP Photo/The Topeka Capital-Journal, Thad Allton
Officials toured vacant homes in Topeka, Kan., last October to illustrate the problem of homes abandoned in the foreclosure process.

Many Americans may not feel it yet, but their economy is doing very well compared with the economies of other advanced countries. Growth is nearly 3 percent. About a quarter million jobs are being added each month. In a world searching for economic propulsion, the United States is now a “lonely locomotive,” as The Economist calls it.

Recovery from the 2007-09 Great Recession is still slow in the US. Yet relative to Europe, which is tipping back into recession, the US has many advantages, such as higher worker productivity, a boost from shale petroleum, and a flush of monetary stimulus from the Federal Reserve. To many economists, one advantage stands out: The US has been quicker to reduce the private debts of homeowners and companies. 

As sloppy and as painful as debt “deleveraging” may be, the American method of bankruptcy, home foreclosure, and mortgage modification has put many consumers back on their feet faster. A culture of forgiveness and a belief in redemption accounts for this willingness to offer a fresh start. But backing it up are court judges and government programs that nurture quick and equitable justice for both debtors and lenders. 

Since late 2008, more than 7 million homes have been foreclosed or sold in short sales. In the lending industry, billions in mortgage debt has been absorbed or written off in negotiated deals. And to provide a second chance to many people, the federal government has lowered the number of years for a borrower with a battered credit score to re-apply for a mortgage after a bankruptcy, foreclosure, or short sale. 

An estimated 17 percent of homeowners still live in houses with a market value less than the money owed. But the mortgage cleanup so far has helped put the US economy back in the saddle, which has started to lift home prices. People stuck with low credit ratings may again be able to borrow.

Compared with debt deleveraging in many countries, lenders in the US look kindly on homeowners who worked with creditors to get out of a financial hole. The last recession hit many people who normally take pride in paying their debts. Lenders or the courts were able to help them.

The sound advice in the Christian prayer of “forgive us our debts, as we forgive our debtors” can have real-world impact after a financial crisis. In the US, debt forgiveness on a mass scale has required a strong belief in each person’s ability to correct the bad habits that lead to excess indebtedness. Writ large, that hope in personal redemption has helped put the US economy back on track.  

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