Where’s My Bail-Out? Right Here (or: How Not To Get Hung by the Overhang)

August 6th, 2011

Inspired by Consumers paying debt, saving more (Washington Post 2/16/11) and Let’s call it the ‘Great Contraction’ (Ezra Klein,Washington Post8/06/11), here’s my humble proposal to get rid of the giant consumer debt overhang that’s choking off the recovery (the idea is right after the little poem).

 

“Can policy help? Both Rogoff and Reinhart think it can. But it needs to focus on eroding the mountain of debt that’s smothering the economy.” – Ezra Klein

 

Why won’t the recovery get off the ground?

Because consumers are by their debt loads weighed down.

 

Here’s a modest proposal to get rid of that overhang

And get the recovery moving with a bang.

 

More money? But we don’t have any.

Fear not — It won’t cost the Treasury a single penny.

 

So if you’re unhappy that you haven’t gotten your bail-out yet,

Here it is – Get rid of your consumer debt!

Click HERE to sign the Change.org petition to ask the President and Congress to take action on this and other proposals to create jobs and grow the economy.

***

One of the things that has slowed the economic recovery is that instead of increasing their spending, consumers have been paying down consumer debt and increasing their savings. That’s a good thing for both consumers and the economy in the long term, but in the short term, it’s a problem, since that money is then not available to be spent on goods and services.

Between 2008 and 2010, credit card and auto loan debt fell from about $1.6 trillion (about $800 million each) to $1.44 trillion ($730 and $710 million respectively, according to the Post). A $160 billion drop is big in absolute terms, but not so impressive in percentage terms (just 10%). That’s why a financial crisis created by debt-overload takes so long to recover from (7 years, according to Dr. Reinhart).

The solutions that Rogoff and Reinhart offer are deliberately sustained inflation (to reduce the real value and hence burden of remaining debt loads) and/or some form of debt forgiveness—both good if you’re the debtor, but not so much if you’re the creditor. I think I have a better idea.

My idea is to create the American Consumer Credit Equitable Savings Support (ACCESS) Fund, or for an even better PR punch, ACCE$$, an independent trust fund. The fund could be capitalized at $500 million, with an option to then increase that to up to $1 trillion if the additional funds were needed.  The fund and payments to and from it would be managed by the Treasury Department.

ACCE$$ would operate with minimum bureaucracy. Consumers wanting to “access” the fund would take their credit card statement(s) from the month before the program was announced (to keep people who didn’t have credit card debt from maxing out their cards after the program’s announcement) and a copy of their most recent pay stub to an authorized program administrator (e.g., banks, notary publics, accountants, corporate HR departments, a local government tax office, etc. which would receive up to a $50 processing fee), where they’d fill out, sign, and submit the application (either on paper or online) (alternatively, clients could apply online directly to the Treasury for a lower fee). If the simple program criteria (debt-income ratio and maximum loan balance) were met, the Treasury would then issue a check directly to the credit card company, paying down the applicant’s debt in full or in part. In other words, ACCE$$ would operate like a balance transfer program. (If unemployed, ACCE$$ clients could substitute a statement of benefits for the W2.)

Repayment would begin after a 6-8 month grace period (depending on when the program started), either by salary withholding, or in a lump sum at the time of 2012 tax filing. The cost to the consumer (beyond the minimal processing fee) would be a 2% fee/interest payment (comparable to bank balance transfer fees) added to the balance at the time of account creation, which (along with the original balance) would then either be paid off in full the following April 15, or through salary deductions over a multi-year period.

The 2% charge would  more than cover the interest paid by ACCE$$ to the Treasury during the grace period. Interest payments for any outstanding balances thereafter could be set at a higher but still reasonable rate (say, 5%), which would mean that the fund would make a significant profit to the taxpayer, while still offering clients significant savings (i.e., 10%+) savings over credit cad rates. The repayment obligation would enjoy the full legal force of other payment obligations to the Treasury, which would improve the collection rate significantly.

More importantly to the economy, participating consumers would be freed from the crushing burden of their consumer debt overload. The grace period and lower interest rates and payments thereafter would also put cash in their pockets, much more than another tax cut, and at a much lower net cost to theU.S.government. And psychological, they’d feel good that their government had finally done something for them, and that they’d “taken care of” their debt.

Anther upside: ACCE$$ would also help the housing market recovery, since the dramatic reduction of consumer debt repayments (to zero during the grace period, and then significantly for the rest of the repayment period due to the lower interest rate) would help homeowners avoid the cashflow crunch that contributes to mortgage default.

The downside and likely source of opposition to ACCE$$: It would reduce credit card company profits, a big chunk of which come from the balances their customers’ run at 14-24% interest, compared to the near-zero rates that the credit card companies pay to borrow that same money from the Treasury Department. So credit card companies (and hence their GOP supporters) would almost certainly oppose this measure. On the other hand, ACCE$$ would also let credit card companies offload their loan balances onto the U.S. Treasury, which would free their customers up to buy more things and incur more debt. (Credit card companies would however be given a disincentive to make loans beyond the borrower’s ability to repay by the repayment priority which the consumer’s debt to the Treasury would enjoy, as is always the case with federal obligations.)

Right-wingers might also oppose ACCE$$ on ideological grounds as another government “takeover” of a private sector business activity, purportedly to help consumers but with the ultimate aim of driving the credit card industry out of business in favor of government-run consumer finance. The wingers would also in all likelihood be incensed by the idea that the government was “bailing out” people who had irresponsibly piled up credit card debt, thus somehow “punishing” the people that had behaved responsibly.

The counter to that common right-wing criticism for any form of government assistance: The ACCE$$ consumer finance program is only a “bail-out” in the sense that the people in a leaky boat work together to bail the water out so the boat doesn’t sink. All ACCE$$ clients would be legally required to repay the borrowed funds, and would receive no taxpayer subsidies. In fact, the Treasury would earn money from the loans, just as it did from the bank and auto industry bail-outs. And to further counter that criticism, the program could be structured as a one-time temporary one, which would self-terminate after the one-time lending and repayment periods (say 2-3 months and 5 years respectively).

So it’s a win-win-win program. Maybe even some Republicans will go for it!

***

Here’s The Last Word’s8/05/11 panel discussion, again starring our friend Ezra Klein, who identifies the big remaining problem restraining demand recovery: consumer debt overhang. (I also loved Jonathon Alter’s “Banana Republicans” reference.)

Visit msnbc.com for breaking news, world news, and news about the economy

Click HERE to sign the Change.org petition to ask the President and Congress to take action on this and other proposals to create jobs and grow the economy.

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2 Responses to “Where’s My Bail-Out? Right Here (or: How Not To Get Hung by the Overhang)”

  1. Newsericks » Blog Archive » My Plan to Solve the Debt Crisis (or: What We Need is a CLEAN SLAT) Says:

    […] NDRP tax could also be combined with my “Where’s My Bail-Out” consumer debt program and “You Can Bank on It” infrastructure bank, reducing or eliminating […]

  2. Newsericks » Blog Archive » High-Interest Credit Card Says:

    […] this isn’t a piece about how to solve America’s credit card debt problem (read “Where’s My Bail-Out? Right Here” for that). Instead, I’m using “high-interest credit card debt” as a […]

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