rates on 10-year Treasury bonds are only about 3 percent, many consumers still carry tens of thousands of dollars of credit card debt at 20 percent or more. This burden has been a continuing drag on spending. The federal government could reduce it by borrowing at 3 percent and lending to consumers at 8 percent under a one-time debt-restructuring plan.
With their debt service payments cut by more than half, consumers could increase spending immediately. And the five-percentage-point spread on money lent under the program would help cover its administrative costs, and maybe even relieve short-run government budget pressure.
This is, of course, correct, though I’d only push it up 4%, myself. I originally suggested this February 9, 2009. It was the right thing to do then, it’s still the right thing to do.
As David Anderson notes, this would be a huge help to ordinary people:
Going from 18% to 8% interest, the individual with $10,000 in credit card debt would see their initial monthly payment go from $250 a month to $167 per month. Using a declining minimum payment formula of (monthly interest expense +1% of current balance), the debt burden at the end of the year is still $9,000 but the interest expense declines from $1,570 to $700. That gap of $870 is greater than the ARRA Making Work Pay tax credit and it most likely would be targeted at individuals with a high marginal propensity to spend (as evidenced by credit card debt.) If balances or interest rates are higher, the freed up cash flow would be even greater.
Also the government can make real, significant money by doing this. All it is is arbitrage. If you can borrow money cheap and lend it at higher rates that’s free money. Not only would that help consumers, and the economy, it would also reduce the deficit. Win/Win/Win. If Blue Dogs are really sincere about their belief in deficit reduction they should jump all over this suggestion.
Note that rates being so high is a classic case of market failure. The banks are charging more than they need to in order to make a profit. In an actual free market other banks are supposed to step in and undercut them, but that isn’t happening. We could argue about why (they’re a collusive oligopoly or they’re broke being the most probable causes), but in the immediate term, it doesn’t matter, what matters is fixing it.
But I doubt it will happen. Why? Because the banks are making a TON of money by gouging customers, and they own DC. I suspect the best we can hope is that this is a warning shot across their bows, a message to reduce the looting or pillaging to “acceptable” levels.
Which will be a heck of a lot higher than you might like, but hey, they run the place.
Tom Hickey
Interesting article by Michael Pettis that’s relevant here.
What do banking crises have to do with consumption?
Basically, households are paying to recapitalize the banks that preyed up them, courtesy of the government.
Ian Welsh
Yes, exactly Tom.
anon2525
With their debt service payments cut by more than half, consumers could increase spending immediately.
But would they increase spending? Or, would they continue to look at the household balance sheet and decide that because of their loss of net worth due to the collapsing housing bubble and the loss of value in their other retirement savings and decide to continue saving? Additionally, should they continue to save (whether they would or not), especially given the ongoing threats made to Social Security and Medicare by Obama’s “commission”?
anon2525
And let’s not forget that unemployment is still a problem — not a good time for someone with $10,000+ in credit card debt to be increasing it.
John J Sears
Man, that Pettis article really is interesting… right up to the conclusion where he says the alternative to soaking the household consumer is privatizing government assets.
Which, here on Planet Earth, is different from soaking the household consumer how?
Bernard
well at least the Serious people are making noises, to give the impression they care? oh please. if you believe the Serious People care, i’ve got wetlands in West Texas. lol
with Obama and the Republicans in charge, with the help of the Democrats, we will see lots of “bipartisanship” that will help “screw” the little people. Oh but we care enough, enough to “make noise,” say the Serious People. lol yeah right!!!
b.
The Fed Card – right idea for the wrong reason…
“With their debt service payments cut by more than half, consumers could increase spending immediately.”
To increase spending, “constumers” need to have higher wages. That means bringing back marginal tax rates up to 95%, it means collective bargaining, and it means tax cuts for poor and low income. It definitely does NOT mean cuts to unemployment assistance, food stamps, and Social Security benefit cuts.
The Fed Card (with IRS collection) makes sense to end a subsidy to the financial institutions that allows borrowing at near-zero interest to collect rent on “lending” (or worse, to speculate or otherwise leverage that “easy money” for profit). Getting the usury out of consumer lending – even just for mortgages, car and college loans, and other concerns of “the little people” would put an end to much of the “banking crisis”. Prioritizing non-profit credit unions over “banks” would take care of much of the remainder.
But, naturally, it won’t happen for either purpose. The system is not meant to serve the nation.
Celsius 233
I quit using banks 15 years ago. It took 30 years with the same bank for me to finally realize what shysters they are (better late than never).
I’ve had 15 years of nothing but good service and low fees from what was my local credit union. I’m still with them but from 10,000 miles away and in 8 years abroad; I’ve never had one single problem.
The sooner Americans dump their banks and just as importantly, their credit cards; the sooner they’ll gain fiscal security and independence.
Min
“Note that rates being so high is a classic case of market failure. The banks are charging more than they need to in order to make a profit. In an actual free market other banks are supposed to step in and undercut them, but that isn’t happening. We could argue about why (they’re a collusive oligopoly or they’re broke being the most probable causes), but in the immediate term, it doesn’t matter, what matters is fixing it.”
It isn’t just the banks that are opposed to fixing it. If ordinary people get out of debt, they will no longer be beholden to the powers that be. Market failure? The markets are working just like they were supposed to, thank you very much.