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:
Let's get to work.
Follow Rep. Hansen Clarke on Twitter: www.twitter.com/RepHansenClarke
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PEW Reveals Racial Disparity In Households Affected By Recession
There are already 392,000+ people who have signed onto a petition supporting Rep. Clarke's H. Res 365 seeking to address these issues and more: http://signon.org/sign/want-a-real-economic.fb1?source=c.fb&r_by=525506
did not stop it from morphing into a monster (4 times larger)...not just private loans, federal loans also we have no voice and no rights when it comes to this mountainous debt...
at the mercy of the government until they decide enough blood has been squeezed, enough straw has been piled or they start locking us up?....
Instead of thinking of it as people looking for a "free lunch," you should be looking at it as citizens demanding part of their lunches back from the bullies that stole them in the first place.
If we can restore a fair and just system, then the personal responsibility you speak of would be greatly treasured. The way things are now, only a sucker would simply accept the uneasy fate dealt to them without demanding reform.
I do not see anything wrong with a democratic discussion about which policies would benefit the most people for the cheapest cost. If paying off certain debt, such as student loans, would have a greater multiplier effect for the growth of the economy compared to other proposals, then it should be enacted.
"the bullies who stole them."
"the uneasy fate dealt to them."
What planet are you living on? If one person needs money for something (to get a college education), they need someone else with money who is willing to lend it to them. As far as I know, nobody held gun to anyone's head when they signed a loan agreement clearly describing the terms of the loan. They wanted or needed to borrow someone else's money, and they were fortunate that someone agreed to lend it to them. Are you suggesting the terms of the loan were OK enough at the time for the borrower to take the money, but now- for whatever reason- that borrower should not feel any responsibility to honor the terms they agreed to when accepting the money?
As a prior posted stated, we must accept the clearing of debts through bankruptcy as a needed mechanism to maintain a healthy economic system. Our system worked so well because it promoted risk taking which leads to innovation and success. This risk taking can lead to failure as well, so in order to continue promoting innovation we must recognize that falling on hard times and becoming hopelessly indebted is not the same thing as intentional theft. Paying usury to a large bank does not promote economic growth. Spending that same money on goods and services does.
No matter what happens with the debt limit and government spending, hard times lie ahead...it is rather a matter of how hard we want those times to be. The best thing we can do is stop pretending a citizenry shackled to the slavery of perpetual debt will grow our economy. Thomas Jefferson warned of the dangers of perpetual debt long ago; perhaps it is time we start heeding his words.
We need to end this judgmental puritan attitude that bankruptcy is a moral failure. Our country and economy are based on risk taking and that produces success and wealth for everyone, but we then have to accept that a certain number of failures occur. This is try with homes and careers. You may study for a career that after four years of schooling is depressed. People need to be able to start again with a clean bill of financial health. This includes being able to include student loan debt on bankruptcies.
Stop letting the far right set the terms of the discussion! What we hear night after night are the soundbites from the far right, claims that social security is the problem and needs to be cut are left unchallenged, claims of punishing "job creators" and "socialist takeovers" are made over and over with no coherent response. This already puts the debate on their terms. So where are you?
Congress can and MUST swiftly correct this system defect by returning the critical consumer protections that they should never have removed. At a bare minimum, this includes bankruptcy protections.
And of course, private student loans are no different, and must have bankruptcy protections returned immediately...the industry was fine before this theft of standard consumer protection, and will be fine when these protections are returned, totally and fully, with no exemptions for non-profit originators, guarantors , etc...
It is always someone else's fault in America.
That even with a lawyer looking over terms, that a simple transaction is now so complex, that they can not explain all the conditions to a borrower is the fault of the borrower? That the terms are now so slanted, and that by law there is no risk to the lender is the borrowers fault? That it has been shown that predatory practices and outright fraud has occurred is the borrowers fault?
There is a third kind of debt, older than the other two and more crippling. The debt incurred in America's TRADE DEFICIT.
America is "barking up the wrong tree"!
Two and a half years since Obama took office have been wasted by this congress with all kinds of un- and counter productive gimmicks.
Re-industrialize America, bring jobs back from overseas and if necessary protect these jobs with tariffs.
Stay the course until the nation has a trade surplus and use that surplus to pay down the budget deficit.
I disagree with almost everything that you wrote. True that many people are underwater in their loans. However, but these transactions have nothing to do with the government. They are the result of two willing parties engaging in free exchange, for which one party, and perhaps both, have come out the worse for it. The government has no role in this situation and taking any action to assist borrowers is simply adding increased moral hazard into the situation.
Individuals, like our government, need to manage their budgets and get themselves out of debt by being responsible and paying their lenders back.
The government has no role in protecting people, or banks, from their own bad decisions. Stand down!
Kai
I come from Earth, America, North Dakota and Arizona for the most part.
The point about the government becoming an insurance company is duly noted. You are completely correct. It is insuring people and companies against their own bad decisions, using other people’s money (though some could argue that the tax they pay is really the premium). The government should not be in this business.
I do not think that the FDIC insures credit card debt. It insures against the bank losing your money, not you losing the banks money.
I agree with you that there is an implicit ‘put’ in American investment that, when things go bad, allows individuals and companies to expect the government bail them out. The government needs to get out of this business.
Frank-Dodd changes none of this. People in Tornado zones will still get covered as will car companies as will financial institutions.
For the most part I agree the American government should not be in the insurance business, picking beneficiaries arbitrarily. Nothing you said contradicts what I stated above.
Kai
Do you think that would change the kind of loans banks would make?
If you said "yes", then congratulations, you recognize that government has some role in determining rules for a market, and your original post is ass-backwards.
Besides, nobody is talking about assisting borrowers, he is talking about policies put into place in the mid-2000's that encouraged businesses to make bad decisions - things like deregulation.
This Tea Party mentality is so ridiculous - shouting "you can't help anyone but meeeeee" isn't a good policy. The wacky part is that you talk about the crash of 2008 as something that naturally should happen - it was just free market transactions, so it's all ok. Well, the crash of '08 isn't OK with me, it had far too many victims that didn't make bad decisions. I don't accept your view that we just have to live with it.
I did not state that the government did not have a role in this situation; I stated it does not have a role in protecting people from their own bad decisions.
The government should be relegated to the minor role of regulating a fair process, predicated on protecting property rights, not assuming the greater role regulating a fair outcome (for some, not others). In other words, the government should not take sides in business transactions, as Rep Clarke is suggesting above.
To your other points:
My answer to your question would be ‘yes’. But it does not automatically mean that it justifies a large government intervention in the market. If fact, lenders could change the way they lend and collect money without any government involvement.
Not talking about assisting the borrower? His first point is about forcing the banks to the negotiating table on debt forgiveness using ‘carrots and sticks’.
Deregulation did not cause this problem; there are several developed countries with less regulation than America that did not have a housing crisis or financial crisis. The problem was a cheap and easy credit (Fed) and perverse legislation (Congress).
OK, you do not like the Tea Party. Nothing to do with what I am writing about above.
Not only is the Great Recession natural, it is EXACTLY the way that markets should react to government intervention. It corrected the intervention. Another reason for more free markets.
Kai