Congress is now completely focused on reducing debt. This would be a positive development, if not for one detail: it's focused on the wrong kind of debt.
With over a quarter of all American homeowners "underwater" -- owing more on their homes than their homes are worth -- and total student loans slated to exceed $1 trillion this year, it is household debt, not government debt, that is constraining spending, undermining confidence, and precluding sustainable long-term growth.
For all the hysteria about government debt, one simple fact remains: the cost of government borrowing remains extremely low. The federal government can raise funds in the short term at interest rates of almost zero; the benchmark 10 year U.S. Treasury bond yields is just three percent, an extremely low long-term rate. This is a powerful statement that international markets have confidence in the US government's finances.
In stark contrast, a hardworking American who lost his or her job in the recession and fell behind on a credit card payment might be subjected to usury-level interest rates of up to 30 percent.
Something is wrong with this picture.
Such high interest rates -- and high levels of household debt more generally -- have more of an impact on most Americans' real disposable income than higher European-style levels of taxation. They reduce Americans' purchasing power, which means they reduce demand for American goods and services and, in turn, worsen our employment situation.
The situation is similar with mortgages and student loans.
In 2009, average mortgage payments surpassed $1,000 per month. This year, the average borrower graduating from a four-year college left school with roughly $24,000 of student debt, despite the grim statistic that -- according to a Rutgers University study -- only 56% of 2010 graduates were able to find work following completion of their studies.
It stands to reason: reducing consumer debt is necessary for stimulating the economy.
But, there's a further reason why Congress should focus on cutting the crippling burden of consumer debt. Congress is deeply responsible for creating the problem.
I believe that the legislative branch played both a passive and active role in creating the consumer debt crisis by deregulating dangerous lending and securitization practices, creating incentives for banks to offer risky loan products, and rigging bankruptcy laws against everyday Americans.
Consider the 2005 bankruptcy law, which made it harder for consumers to discharge credit card debt through bankruptcy proceedings. By eliminating the risk associated with targeting borrowers with questionable ability to pay, this legislation enabled many banks to have a field day preying on people with limited financial literacy, making as many loans as possible to maximize fees. Similarly, an opaque system of securitization -- facilitated by Congress through the Commodity Futures Modernization Act and other legislation -- empowered mortgage lenders to profit from processing fees regardless of whether or not the mortgages were sound. This further incentivized predatory lending.
This deregulation also helped give rise to the mother of all bubbles, an $8 trillion bubble in the housing market. When this burst, millions of innocent people lost their jobs. Because of recklessness in Washington and gambling in the Wall Street casino, untold numbers of hardworking Americans were thrust into a situation in which they could no longer afford to make their payments and therefore faced massive fees, usury interest rates, and/or eviction.
These people never received a bailout.
But, then again, most are not asking for one. They are simply asking for a system that is not rigged against them. And Congress has a moral obligation to deliver that.
Right now, Congress could take several important steps with minimal budgetary impacts. It could, for instance:
- Create the right incentives for banks to come to the table and negotiate with distressed lenders. This might mean applying "carrots and sticks" in the tax code to favor lenders that seek to avoid evictions. It could also mean legislation such as "Right to Rent," which would enable foreclosed homeowners to stay in their homes by paying an independently-assessed monthly fair market rent.
- Provide tax credits for education expenses and for student loan debt
- Make private student loans -- particularly those written under unfair terms -- eligible for discharge in bankruptcy proceedings
- Swiftly confirm the new director of the Consumer Financial Protection Bureau so it can get to work restricting unfair and deceptive lending practices
Let's get to work.