Saturday, September 3, 2011

Saving Ourselves

How to Save the American Economy
by Saving the Middle Class Consumer

Americans owe about 2.5 Trillion Dollars in non-mortgage consumer debt.  That’s a lot of money.  It breaks out to about $8,300 per person, with 1/3 for credit card debt, and 2/3 for non-revolving debt such as auto loans and student loans.  With the average American family at 3.15 people, that works out to an average of $26,000 per family.  However keep in mind that consumer debt tends to be weighted toward families with children living at home.  The average American household income is right around $50,000, so we see an average consumer debt burden of slightly over half of the gross household income.   Toss in taxes, household bills, gas, and the rent or mortgage payment, and you have the average American household living paycheck to paycheck.  That’s the average.  That means that a lot of American families aren’t making it into the black every month.  This is what is known as an unsustainable situation.  This is why over a million Americans file bankruptcy every year.
An American losing his home.
In America we have a consumer based economy.  That means most of us make our money when our fellow countrymen are buying stuff from each other.  Consumers are the root and heart of our economy.  As more and more of us have less to spend, we stop buying.   The key to understanding the economy is to understand that it’s all about money moving.  Money is like blood.  When the money sits still, the economy stops.  When the money is moving the economy is better.  Money doesn’t disappear, it just moves or sits still.  We need to keep the money moving.  Circulating, if you will.
In today’s America, we as consumers are the ones who move most of the money.  We are the heart of the economy.  If we stop buying houses and new cars and flat screen tv’s and vacations to tourist destinations then the money doesn’t move to those industries and they shrink or go out of business.  If we consumers are squeezed even tighter then we cancel our cable tv and turn down the heat and air conditioning and stop paying our Visa and MasterCard bills and use up our savings accounts to buy groceries then the banks and utilities start to lose money.  This is what has been happening for the last three years.
So we have The Great Recession.  Why?  Because consumers are over-extended and cannot find enough well paying work to cover their current expenses and make additional purchases of new products.  All this talk about the banks failing and derivatives and CDO’s and securitizations and AIG and Goldman Sachs and the government debt is missing the point.  They are stems and leaves.  Results, not causes.  Symptoms, not the disease.   All of our current financial problems are rooted in the American consumers’ inability to pay their bills.  To fix the economy, to get out of The Great Recession, we need to fix the American consumer.
Why indeed, Barney?
When American consumers can pay their bills, then delinquencies and defaults on credit cards, loans, and mortgages will plummet.  Fewer people will file bankruptcy.  These defaulting consumers are the basis for the problems with Mortgage Backed Securities and Asset Backed Securities and Collateralized Debt Obligations and other derivatives that everyone is afraid or unwilling to value as the skeletons in the “too big to fail” banks’ closets.  They all ultimately rest on simple consumer debt, which in turn rests on the shoulders of American consumers.   Real people.

When American consumers can pay their bills, they will be paying more taxes, which will help the federal budget and national debt.
When American consumers can pay their bills, they will be willing and able to buy new things, like cars and tv’s and houses, that will start the economic cycle of money swirling around again.
When American consumers can pay their bills, bankruptcies and foreclosures will go down dramatically, along with the attendant trauma to American families, marriages, communities, and children.
Foreclosure - What is it good for?
The real answer to our economic problems then seems pretty obvious.  We need to fix the American consumer.  What is the ailment?  Debt.  How do you fix debt?  Money.  How do you get money into the hands of the American consumer?  Four ways.  First, and preferably, with jobs, but that is not happening and will take too long.  We are already over three years into this mess and unless we want our very own “lost decade” we need to nut up and find the political will to take some fast acting medicine.  Faster alternatives are giving money away (simply not doable), or cutting taxes (not powerful enough, limited in scope, and subject to political shenanigans).
American should declare war on the Recession

 The real answer is to allow everyone to re-finance.  How? A Consumer Bailout.  We, America, can lend ourselves the money to re-finance our 2.5 trillion dollars in consumer debt, at very low interest rates and with a long repayment period to provide a low monthly payment. We can do this.  Now.  Yes, we can.  
Go, Bo!  How about some leadership?
Here’s how it would look:
The Treasury sets up a $2,000,000,000,000 special credit facility where any American consumer can consolidate all of their consumer debt (non-mortgage) into a Federal Consolidation Loan.
Not your Daddy's Depression
Not your Daddy's Solutions
Banks and Credit Unions will conduct intake and process the loans for 50 basis points of the loan amount.
Treasury issues special classes of bonds to finance the loans, initially to be paid through repayments, and insured by the full faith and credit of the United States.  Treasury will charge a 100 basis point insurance fee for this.
The IRS will issue the loans and process repayments.  Loan issuance will be directly to the consumers’ creditors, similar to the process used in distributing funds in bankruptcy.  Haircuts may be required where interest or fees are excessive.  Repayments will be required to be automatically taken out of borrowers’ payroll checks where applicable, or remitted monthly otherwise.  IRS will charge 50 basis points per payment amount.
Borrowers will be able to borrow at the prevailing 30 year bond rate plus 2% for a period of up to 30 years depending on the amount borrowed.  Borrowers will be able to borrow up to $200,000 dollars for existing debts that are at least six months old.  Borrowers will be able to obtain forbearances for periods of unemployment or financial distress similar to those available to student loan borrowers. 
A fresh perspective on credit
Conditions can be put on eligibility that consumers pass a money management literacy test and agree to some limitations on future credit to prevent them from going back into unmanageable debt. More people can get used to paying cash for a while.
Teaching a better way
We need new leaders is Washington who will try new solutions.  Consumer credit on this scale is new.  The solution to these problems will need to be new.
New Generation - Economist Austan Goolsbee
 and his smokin' hot wife Robin

Debt is the problem. Restructuring is the answer. Everybody benefits. The American people will get relief, and American families will not be torn apart by the stress and shame of foreclosure and bankruptcy. Banks and creditors will get paid, filling their coffers and strengthening their balance sheets.
What’s not to like?