Is It Time to Forgive Consumer Debt?

It’s been almost four years since the Great Recession of 2007.  Since then, American companies have laid off hundreds of thousands of employees, millions of Americans have received foreclosure notices, and consumer debt levels have left a dark cloud over our economy.  After several attempts to spur economic growth, the administration seems to be out of options.  Efforts to promote job growth have faltered, homeowner assistance programs consistently miss their mark, and debt has shackled the wallets of all Americans.   It seems like something has to give.  A few economists are proposing a radical step to revive the American economy, but their medicine might be too much for Wall Street and the banking community to swallow.

Many Americans feel left behind because of the financial mess we’re in, and modern movements, such as the Tea Party and Occupy Wall Street, have seized on their desperation.  To be fair, the current administration had their work cut out for them when they took office, and the severity of the issues plaguing the economy may have been too much for anyone to manage, especially within the poisonousWashington atmosphere.  Now, some outside of the administration are offering a radical change to get things back on track.  While we’ve bailed out banks and other institutions, little has been done to balance the bottom line of the American household.  “Debt Jubilee” is an attempt to do just that.

Debt Jubilee is an idea born out of economic necessity.  The measure calls for debt-ridden consumers to receive real mortgage and credit card debt relief, even if it means forcing banks to incur severe write-downs and bond investors to absorb losses.  I’m sure many of us can get behind such an idea after all we’ve been through, but the initiative is not an easy fix – there are moral implications.  For example, how do we help all Americans without the perception of rewarding bad behavior or irresponsible choices?  Can you tell a homeowner who lost their job you can’t help them because they “bit off more than they could chew?”  What message would it send if you, essentially, wiped the slate clean on millions, perhaps billions of dollars of debt?

Before we can answer these questions, we have to take a hard look at our economy. Bank bailouts totaling nearly a trillion dollars saved the banks from collapsing, but did little to stimulate the economy. The Fed’s move to keep interest rates low has worked, but it hasn’t produced many new homeowners. Meanwhile, millions of Americans remain burdened with mortgages they can no longer afford, soaring credit card debt, and unbearable student loans.  It is this debt, not bank losses, which stifle economic growth.  Ok, Economy 101 – supply and demand.  If there is no demand for goods and services, supply decreases.  If 99% of the population, who drive 2/3 of economic activity, lose their purchasing power, we get what we have right now – an economic Catch-22.

On the other hand, we can’t simply forgive the debt people have amassed. Doing so would undermine our credit system.  Trust me, banks will find a way to make up the losses for ANY write-downs they’re forced to make.  And you know what, we can’t blame them.  Banks are businesses, and they have an obligation to shareholders.  When profits are jeopardized, they have to find a way to offset those losses.  For instance, we’ve heard a lot about banks instituting monthly debit card fees.  This was a reaction to the loss of merchant fees through recent legislation.  Granted, it is a heavy-handed approach, one that will gain them no public relations points, but it shows the lengths institutions will go to meet their obligation to shareholders.

Should we begrudge these businesses for maintaining profitability?  Profits lead to growth, which lead to employment opportunities, and, ultimately, salaries that can be spent in the economy.  When the future is unclear, businesses cut jobs, hold back on raises, and postpone hiring.  It’s also true that, when people are unsure about their income or how they’ll pay their bills, they don’t spend.

There is no doubt that we are in the throes of a unique economic downturn, but the answers are not as simple as “give banks money” or “erase people’s debt.” We need to find common ground where we can collaborate to make things easier for consumers and banks.  That’s a daunting challenge, but remedies that help one at the expense of the other will only prolong our recession.  Until next time, I’m Thomas Fox for Cambridge Credit Counseling.

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2 thoughts on “Is It Time to Forgive Consumer Debt?

  1. There seems to be a long list of reasons/excuses that result in people like me not getting a break and being denied what little we are entitled to. Making Home Affordable is a nice name and I thought that was what it would do. My income was zero for two years due to illness and SSD backlog but finally getting an income each month was great news for me. It did not impress Chase who would not modify my mortgage. Hardest Hit-that describes me yet I was too far behind to qualify and was not allowed to apply. My mortgage just became “upside-down” this month. I wanted my home and should have been happily paying my mortgage with the late payments placed at the end of the loan. I still want it but now I owe mort than it is worth and am on a deadline for mandatory sewer hook-up and though I had been fixing up my home a little bit at a time-I am not willng to invest thousands in a home Chase will not budge on to help me reinstate or modify existing mortgage. I saw termite droppings today. I just put a pump in so I could use my well. I repaired the roof. I thought this was going to continue to be my home but it is not in paper anywhere-only in my heart and my mind..

    • You are not alone. Many people could use some support from the banking community regarding their mortgage. As we continue to their tumultuous economy we hope more responsible efforts will be made to help people stabilize their financial lives. In relation to the housing market, what goes up must come down. The country faced a tremendous housing bubble, and like all bubbles– it burst. The good news is that, over time, housing has been a sound investment. It may take several years, or more, but most anticipate losses in housing should subside, and values will eventually rise.

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