This is not a conclusion of ivory-tower academic researchers, this is the common sense on exhibit in The Guardian's financial pages, read it here http://www.guardian.co.uk/business/2011/oct/02/underwater-mortgages-america-could-sink-without-trace.
The author quotes the IMF as recommending partial debt cancellation to get the economy going again, and brings up the Objection #1 to any Jubilee plan: the "moral hazard".
I think it is funny how the "moral hazard" objection always gets trotted out when you hear anything about debt forgiveness, but you never seem to hear "moral hazard" mentioned when they are discussion bailouts for banks.... Funny how that works, isn't it?
Choice quotes:
The stagnant housing market continues to erode families' wealth and saddle them with ever more unpayable debts.
It's unlikely to deliver a permanent solution to the economic malaise unless the housing market can be stabilised and the legacy of mortgage debt resolved.
The underlying problem in the US housing market is that the debts run up in the years of plenty will be a millstone around the neck of the economy for many years – and may ultimately be impossible to repay.
Even the IMF, hardly known as a champion of aggressive government intervention, said in its latest world economic outlook that Washington should try to find ways of writing down the value of some of these overblown loans.
"The large number of 'underwater' mortgages poses a risk for a downward spiral of falling house prices and distress sales that further undermines consumption and labour mobility," it warned,
Each of these [proposals to write down debt] would be controversial, and they carry a risk of "moral hazard": the fear that reckless borrowers will in future feel they can take on eye-watering loans and assume the state will bail them out. But the alternative may be years of stagnation.
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