The President's bailout proposal misses the point. It seeks to benefit the credit industry by offering it an enormous amount of money to get it out of the mess it has largely created for itself, without providing any real relief to common consumer and mortgage debtors--average people with little money and therefore no influence. Instead, the credit industry meltdown should be used as an opportunity for debt relief for common people and major revision of the way debt is used in our economy. This CAN be done without sacrificing the credit industry or the U.S. financial system. Here is my proposal for how this can be done:
1. The heart of my proposal: Use the bulk of the funds proposed for the bailout to offer federally-funded or federally-guaranteed consolidation loans, having long terms and strictly regulated interest, to allow debtors who are presently holding sizable distressed personal loans of ANY type—but particularly of types that are marketed through pooled instruments in which the government’s credit is directly involved (e.g., mortgages and student loans)—to consolidate all of their non-business debt.
2. The trade-off for the financial industry should be that it accepts stricter government regulation, including particularly regulation of how it packages and markets consumer credit and residential mortgages and regulation of practices designed to keep consumers in debt. The age of wild promotion of debt--second mortgages, home equity loans, credit cards--as the cure for everything must end.3. My proposal will help the credit industry’s immediate financial position, in that the principal amounts of loans in default or high risk of default will be immediately paid. This will immediately put large amounts of money back into the private financial industry. The high-risk debts will be removed to new, government-backed loans. The original creditors will no longer be exposed to the risk inherent in thse loans.
4. The assumption of my proposal is that most of the debtors in distress are only distressed, not inherently dishonest, and actually WANT to pay off their debts. If this is true, the government can expect to recover most of its immediate investment in the bailout over a period of years as debtors pay off their consolidation loans.
5. Obviously, better consumer credit education is also needed.
6. Note that the credit market is not now—nor has it ever been—a free market. It is a highly regulated market, even today. The “deregulation” of the last 25 years only removed restrictions that benefitted ordinary consumers. It left in place the regulations that supported the industry’s profits, at least during good years. Regulations that have trapped people in their debts, preventing any escape in bad years, have also multiplied, and the bankruptcy laws have been made "tougher" three separate times in the last 25 years.
7. Note that traditional usury laws, though no longer fashionable, had a valid purpose. Interest should be regulated.
8. My proposal would be more effective if it were joined with reforms in health care delivery and payment, and education, two economic areas that create large amounts of (at present often almost compulsory) consumer debt.
9. My proposal would also be more effective if the bailout for individual consumer debtors in distress included real assistance in a) selling nonexempt property for which there is an estblished market at the highest available price (i.e., not a sheriif's sale-type bargain basement) and b) creating an income stream from nonexempt property for which there is no established market but which could become a source of income with proper management--with the resulting income from a) or b) being credited to the debtor's account.
If we are really going to spend, ultimately, more than one trillion dollars fixing the credit system, we should really FIX it, not just put more wealth in our collective creditors' pockets. If real, serious structural changes are needed--and they obviously are--we should spend our money actually making them, not just making the rich richer.
