Introduction
The traditional narrative of financial crises focuses on bank failures, overlooking their true trigger: a sharp drop in consumption. When indebted households lose wealth, their reaction is brutally rational—a drastic cut in spending. This article analyzes how the rigid architecture of debt amplifies recessions and why the solution may lie in the Shared Responsibility Mortgage (SRM) mechanism.
Debt Rigidity: The Primary Transmission Channel of Recession
The core problem of modern finance is debt rigidity. Unlike stocks, the value of a loan does not decrease as asset prices fall. This turns debt into "anti-insurance"—instead of dispersing risk, it concentrates it at the system's most fragile points.
The Leverage Multiplier Erodes Household Net Worth
The leverage multiplier mechanism ensures that even a small percentage drop in home prices drastically hits a debtor's net worth. With a high LTV (loan-to-value) ratio, equity becomes a seismograph of market tremors, leading to a collapse in demand among those with the highest marginal propensity to consume.
Tradable and Non-tradable Sectors: Channels of Demand Decline
The crisis spreads through precise channels. First, it hits the local non-tradable sector (services), where demand is regionally trapped. Then, through the tradable sector (exports/manufacturing), the infection spreads to the entire economy, even affecting regions free from the housing bubble.
The Neighborhood Effect: Foreclosures Lower Home Values
The neighborhood effect acts like a financial virus. The forced foreclosure of one home lowers the valuations of neighboring properties, which pushes up their LTV ratios and triggers an avalanche of defaults. This is a classic negative externality that the market cannot price on its own.
Bank Bailouts Do Not Revive Consumer Demand
Traditional bailouts are largely ineffective at fighting recession. Money pumped into banks protects creditors but does not restore debtors' purchasing power. Saving the "plumbing" of the payment system is necessary, but it is no substitute for rebuilding household balance sheets.
Shared Responsibility Mortgage: Sharing the Risk of Price Declines
The SRM mechanism assumes that the loan balance and monthly payments are automatically indexed to a public house price index. If local prices fall, the debt decreases, preventing a spiral of defaults and stabilizing consumption.
Four Principles of Modern Mortgage Architecture
The new system must be based on: automation (no discretion), supply discipline (the bank must retain part of the risk), consideration of the neighborhood effect, and index transparency, which must be treated as a public good.
Debt Indexing Stabilizes the Macroeconomy
Automatic debt indexing allows the credit bomb to be defused before the debtor finds themselves "underwater." It is a macroprudential tool that protects the economy from sudden demand shocks, making the system more resilient to business cycles.
SRM Effectively Limits Moral Hazard
The moral hazard argument is groundless, as SRM relief depends on an objective market index rather than the debtor's actions. In fact, this mechanism disciplines creditors by limiting their incentive to recklessly fund speculative bubbles.
Institutional Barriers Block SRM Implementation
Implementing SRM requires overcoming resistance from banks, which would need to overhaul their risk models and recognize the market risk of mortgage portfolios. Another problem is the lack of a liquid insurance market for such highly correlated losses.
Home Equity Contracts Generate New Risks
Currently, the market is filled with hybrids like home equity investments. While they confirm the demand for risk-sharing, they are often asymmetrical—the investor captures the upside while leaving the downside risk to the debtor in a hidden form.
Securitization Reform Restores Market Transparency
SRM securitization must be tied to an absolute risk retention requirement for the loan originator. Only "disciplined securitization" will prevent a repeat of the crisis, where risk was alchemically hidden in complex tranches.
Three Scenarios for the Evolution of the Mortgage Market
The future holds either the dominance of a gray zone of hybrids, the standardization of contracts by the state, or a macroprudential revolution where flexible debt becomes a standard part of the safety infrastructure.
Stable Consumer Balance Sheets Drive Business
For the corporate sector, stable consumer balance sheets represent strategic demand security. Companies cannot absorb the collapses resulting from bursting debt bubbles; therefore, SRM is in the interest of all industry and services.
Systemic Responsibility Replaces Moral Guilt
We must stop viewing crises through the lens of moral guilt and start managing systemic responsibility. Rigid debt is a promise to sacrifice the most vulnerable when forecasts fail. SRM proposes a fairer deal: sharing risk with those who turn credit into a business. The true strength of a modern economy lies not in punishing debtors, but in intelligently sharing responsibility for inevitable market fluctuations.
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