Since nobody thinks the Obama administration’s approach to housing policy and foreclosures has worked very well, there’s an increasing sentiment that failure to get this right has been a key thing holding back recovery. I don’t really think that analysis holds water, but in some circles on the left basically any defense of Obama on this score tends to get labeled as rank apologetics. So I hope Dean Baker will be immune from such accusations, since he’s managed to put together a very persuasive defense of the Treasury Department’s view of the relationship between mortgage debt and the recovery without mentioning that that’s what he’s doing. As he points out, the math around the idea that writing off underwater mortgage debt would support enough extra household consumption to meaningfully dent the output gap doesn’t hold up.
Which isn’t to say that debt relief policies wouldn’t help the economy to some extent. But on a per dollar basis there’s really no reason to think that this would be an especially good way of stimulating the economy relative to tax cuts or grants to state governments or whatever else. Budget deficits and expansionary monetary policy can plug he output gap, and insofar as mortgage relief is a specific form of deficit spending that’s fine, but there’s no special sauce in the mortgage debt issue.