Dilemmas of Debt Restructuring: State Interventions in the US Foreclosure Crisis

• In Event: Financial Systems and Social Citizenship in American Political Economy

Abstract

Domestic debt crises create dilemmas involving fundamental questions of welfare, redistribution, property rights, and the nature of the financial system. At the national level, policymakers must choose between radical state intervention that restructures debts for borrowers—resulting in enormous losses for financial institutions and taxpayers, and setting a precedent of retroactively changing contracts within a capitalist economy—or the significant loss of citizen welfare and national economic health. At the subnational level, governments are both more and less constrained: they have fewer resources for relief, but are less accountable to national financial interests. This paper examines the conditions under which subnational governments within a liberal market economy/welfare regime intervene to protect citizen welfare by regulating and restructuring household debt, even when the national government fails to do so. Leveraging variation across state-level policies in response to the 2007-2010 foreclosures crisis in the United States, the study uses mixed methods to measure the extent to which debt relief policies were discussed and implemented, whether they took the form of temporary compensation or durable reformation, and what relationship they had with underlying political conflicts and normative debates around redistribution, fiscal conservatism, and the role of the state in crisis management.

Author

• Angie Jo, Massachusetts Institute of Technology