I solved the financial crisis! What do I get?

[Kurt_and_Hunter]

This is so simple it will never be proposed, let alone tried, but it would actually work. Since Obama is on holiday I'm sure he has time to catch up on his DU lurking and he's free to appropriate my solution. :)

The federal government offers to buy up one trillion dollars of consumer debt. You owe $15,000 in credit card debt to Citibank. The government pays off the card and you now owe the government $15,000 at something like Prime+1. Let's call it 8%.

Here is what just happened...

1) Since your debt is at 8% instead of 20-25% Your monthly minimum payment went down $100-$200... whatever it works out to. That is equivalent to a pay increase and, unlike a stimulus check, you get that benefit every month.

2) You have an empty Citibank card you can buy things with. (At the usual 20-25% rip-off interest rates.) Since you now owe the government $15,000 you are still in debt and the card company will probably want to reign in your limit some, but even if they cut the credit limit on your now paid-off card from $15,000 to $5,000 you still have $5,000 more credit than you did last week.

3) Most risk in the existing consumer debt market has vanished, improving the balance sheets of all financial institutions. And the creditor banks just got the biggest cash-flow infusion in history.

4) Credit card banks now have fistfulls of cash and a strong incentive to restock their consumer debt income streams, so they will have to compete with each other for consumer credit. And since they are not holding all that perilous existing debt they have less incentive to jack up rates, close credit-lines, etc..

5) The government has a trillion dollars in debt earning 8% financed by selling treasuries at 3.5%. (Which are still in high demand because of the global situation.)

This would hit like a bomb. Economic activity would increase 10% in a week. No debt principal is forgiven so there's nothing for the public to get too exercised about. People who managed their debt better don't gain as much, but that will apply to any stimulus package. When you help the people or corporations that are in trouble you will inevitably subsidize bad behavior to some degree.

And the banks don't lose because they have already decided their consumer debt portfolios are a negative... why else are they withdrawing so much credit and jacking up rates more? This would be a rescue for them. Plus, I assume the government would offer the banks a fee for continuing to collect the debt at the new low interest rate. They're already set up for it.

And it would benefit mortgage foreclosures. Almost all home-owners have credit cards. Anyone who is in default on their mortgage but hasn't already maxed out their credit cards isn't very serious about paying their mortgage. So this would be equivalent, for most households facing foreclosure, to readjusting their mortgage by a percent or two.

[Wapsie B]

1. Why not just pay off consumer debt completely, credit cards and mortgages?

Think of the economic boom that would take place when people had all that discretionary income. For those without mortgages or credit cards give them a check. However it's only a pipe dream that would never happen because the supply-siders do not believe in giving a boost to the little people in this country. And I'm afraid Dems would go along with that sentiment because well, republicans might say bad things about them. :eyes:

[lapfog_1]

2. How about we just return the Usury Laws

and put the cap at prime+1 as you say.

No bailout, the banks are stuck with the debt (they made those "loans" by issuing the credit cards, the consumer gets the same break, but isn't extended NEW credit by which to make the problem even worse.

In addition, cap the late fees and over limit fees, etc.

[Kurt_and_Hunter]

4. Because more banks failing doesn't help anyone.

Morally, I'm with you. But in practical terms it's important for the banks to remain standing because they are needed to issue new credit.

[lapfog_1]

5. So, am I to understand that banks MUST make 16% to 24%

interest on unsecured debt (credit cards) so that they can survive?

Because that's what you are arguing.

How many banks actually issue credit cards? Have we not provided many of the larger ones with 10s of Billions of bailout money already (which doesn't include the probable 100s of Billions in Fed "float").

I realize that we don't need the bank failures, but when they use the TARP money to leverage buyouts of other banks instead of removing the "troubled assets" from their balance sheets which was supposed to unfreeze the credit markets (the banks would loan money again because their portfolios would look healthy again)... what makes anyone think that this bailout would be any different?

We need to let failing banks fail and have the government step in and use the FDIC money to pay off depositors (moving their now "cash" assets to healthier banks, just as it was designed to do. Have more than $100,000 on deposit at a failing bank... too f'ing bad.

And if that doesn't work completely, nationalize the banks and have the government take over.

[Kurt_and_Hunter]

7. They don't clear 16%-24%, at least not in a down economy

If they did nobody would issue bonds at 3-6%. They'd just get into the credit card business.

Credit card debt is higher risk so it will always be higher rate. The usury rates credit cards charge seem absurd, but I just had an empty card at 18% closed unilaterally, so they didn't want my business even at 18%. They wanted to reduce their exposure.

It's a tricky situation... the rates are insane, yet almost all card issuing banks will have losses in the billions this year. So credit card defaults must be through the roof right now. (Even with the bankruptcy bill.)

Either way, we gave the banks money and they won't lend it, even at 18-25%, because they're afraid of what will happen to their existing accounts. They are hoarding the cash in expectation of defaults.

By zeroing out their consumer credit portfolios they would have no future down-side to hedge. But without their former interest income they would need to put that cash back to work.

It is precisely because consumer debt is so potentially profitable that this would spur new lending. If banks won't lend at 5.5% right now secured by real estate they sure won't lend at 8% secured by nothing.

Just because they're crooks doesn't mean they can't lose money.

[Turbineguy]

3. There's just one tiny fly in the ointment....

There's no provision for CEO bonuses.

Other than that it's a great plan. Which almost guarantees it will not be adopted by the Repubs.

And if You are lurking, Happy New Year to You and Yours President Obama!

[busymom]

6. FAIL!

We did something similar a few years back when my husband was still in training.

We were able to take out a special loan to pay off all of our credit card debt with the bonus that we made interest-only payments for 3 years. All of our credit cards were paid off and our payments were substantially lower every month. We were elated, so what did we end up doing? Slowly using our credit cards again.

DUH. We didn't learn a damned thing. At the end of it all, we owed the money all over again. Ultimately, our payments weren't lower, they were HIGHER.

No. The solution for America is not getting Americans to mortgage their futures with credit cards....it is train better scientists and engineers and begin producing quality products again...not just consuming cheap, chinese crap at 28% interest.

[Kurt_and_Hunter]

8. SUCCEED!

That's the point. This isn't a plan to get people to have better household balance sheets. It's a plan to create a tremendous amount of economic activity to avoid going into a depression.

Of course people will run up their cards again. That's the idea.

Americans are good at spending money and that's our only way out of a deflationary environment. Unlike 9/11, the right response to this situation actually is, "Go shopping." But nobody has the cash or the open credit to do it.

All stimulus plans involve debt... people assuming debt or the the government running up debt on their behalf. As one of Obama's economic advisers said in a fit of candor, "if you pay for it it's not stimulus."

People will have a much better chance of digging themselves out of debt in a growing economy than in a depression so preventing a depression trumps all other considerations.

A deflationary environment turns all the rules topsy-turvy. We need everyone to go hog-wild at exactly the time their inclination is to hunker down and save.

[busymom]

9. No offense, but.....

Once they run up their debt again, they will be in the position of struggling to pay it off!!! The whole problem with the credit crunch right now is that we have lived beyond our means. People will run up their cards again, causing a SHORT-TERM relief economically until...surprise, surprise...they won't be able to pay them off anymore and will begin defaulting again!

We have to think farther than next week! The solution involves making CEO salaries more reasonable, creating a living wage, ensuring that everyone has basic healthcare somehow...and learning to live within our means.

ETA: The stupidest thing we feel like we did as a couple was running up those cards again. We were in the fortuitous position of coming into enough money to start paying it down seriously. I don't know what would have happened if we hadn't had that good luck.

Now, my husband and I pay cash only for our purchases....even our flat screen TV that cost several thousand dollars. We saved up the money and then bought it when we had the cash. Credit card companies are criminal. They charge outrageous fees and interest rates, will jack up your fees for anything and then you are stuck paying. I have several credit cards and I don't use a single one of them!

[Kurt_and_Hunter]

10. I understand, by this is a macro situation

I would rather owe $20,000 in a good economy than owe $10,000 in a depression.

Put another way, I would rather owe 20K and be employed than owe 10K and be hopelessly unemployed.

If we go over the edge the people you are talking about are screwed much worse.

What you are saying would be correct in an expanding economy. It's excellent personal household advice. But in a contracting economy the rules go topsy-turvy and doing the right thing individually becomes a disaster collectively.

One reason Japan couldn't get out of a flat economy for decades was that their people are responsible savers. The government kept trying to get them to take on debt and spend like idiots but they wouldn't.

[busymom]

12. What you're suggesting though only hurts people.

You would rather owe 20k and have a job than 10k and have no job? The economy sucks right now...we are going through terrible growing pains. Ultimately, I have faith that some industries will fail BUT that they will be replaced by new companies with jobs...our country is going to have to grow in a different direction. This isn't the first time in our history that certain industries have been hard hit and have had to close down....but as Americans, we will come up with new ideas, new businesses...we will survive and eventually thrive again.

Why would you want to work harder to be farther behind? That makes no sense at all. It is not the responsibility of the consumer to spend money until they are practically bankrupt. It's a bad long-term policy for this country and it's a bad policy for the individual households in this country. It is better to look at how we can get a handle on this long-term.

America doesn't produce anymore....we are not innovators....THAT must change! We have to start leading the way again...and that will create new professional jobs....Lets have the government put its money there.

[TheCowsCameHome]

11. Double your losses back, if not completely satisfied.

[ecstatic]

13. so what about those who don't owe 15k on credit cards

and aren't in foreclosure? Will the government just send my check directly to me? :) :shrug:

[Kurt_and_Hunter]

14. That's like what about those who don't own a failing bank.

Stimulus is never fair. Any interference with the law of the jungle advantages screw-ups and the irresponsible.

I would rather benefit individuals households who got themselves in debt trouble than direct the same resources to giant corporations who got themselves in debt trouble.

Any stimulus will benefit some folks more than others and be riddled with inequity. But the point is that the goal is to make something happen in the economy, not benefit people directly. The winners in a stimulus plan are just means to an end.

And one good thing about credit card debt, unlike people buying five over-priced investment houses, nobody carries credit card debt as an investment. The beneficiaries wouldn't be the wisest or most prudent people but at least they would all be people in genuine economic difficulty.

[busymom]

15. No it's not...

and the inequity in certain stimulus packages also hurts many people who have been responsible with their credit and debt.

We were not responsible for about 8 years and paying it back hurt...a LOT. We did it....and we are better for it.

The winners in this case are those who have bought more home than they can afford and have overspent on their credit cards. The losers are the hard-working tax payers who will have to foot the bill. Those people who earn more than the 100k a year or whatever it is also are hard workers, btw...most of them didn't just fall into their money and they have mortgages, kids and credit card debt. The stimulus doesn't benefit them...but they will pay for it and pay a higher percentage of their income in taxes.

I'm not a fan of Robin Hood fiscal policies, even if they benefit me.

I just can't get behind bailing out individual people anymore than I can get behind bailing out big corporations. We had to bail ourselves out with extra work, being frugal and pinching those pennies until it hurt..and that is ok...because we accrued the debt! We spent the money!