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A Better Solution to the Debt Crisis

It is widely acknowledged that the crux of the economic crisis in the U.S. is too much consumer debt.  The attached chart shows how that debt ballooned over the past decade.

If the government is going to put the country into $6 trillion of additional debt, at least they should aim it at the crux of the problem.  $6 trillion is approximately equal to $20,000 per American citizen.  Instead of new spending programs in Washington D.C. that do nearly nothing to create new jobs, if U.S. consumers were free of debt, they would begin the spending and create the demand that causes new job creation.

Let the government send each American $20,000 in new coupons.  The coupons can only be used to pay off credit card or mortgage debt contracted prior to 6/30/09.  The coupons would be convertible at par into U.S. dollars by any holder of credit card or mortgage debt.  For mortgage debt, the coupons would be eligible to pay down the mortgage debt to 80% of the current appraised value.  The coupons should be freely transferable.

A secondary market for the coupons would immediately develop because there are Americans with little or no debt that would be eligible to use the coupons.  I suspect that the coupons would trade for a slight discount.  Eventually, the coupons would all disappear as they are converted into cash and the eligible debt is reduced.

Household debt, which now stands at near $14 trillion, would fall to $8 trillion, about where it was in 2001 (see chart) before the easy monetary policies of the Greenspan and Bernanke Fed kicked in.  Other benefits include an end to the real estate downward price spirals.  With mortgage levels now less than the value of the homes, consumers will feel confident again.  The financial system will greatly benefit as the foreclosures lessen, the value of real estate stops falling, and consumer credit delinquencies abate.  With credit card debt paid down, the retail sector will benefit, as will manufacturers of retail products.  Most important, new consumer demand will create new jobs.  Eventually, every sector of the economy will benefit.

In the end, the total debt burden of the nation doesn’t change.  It has just been switched from the consumer balance sheet to the government balance sheet.  Yes, it burdens future generations, but current policies are doing that anyway.  However, with a growing economy instead of a stagnant one, tax collections will rise faster and the debt burden will be easier to deal with.

 

Robert Barone, Ph.D.

Matt Marcewicz

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