Ideas swirling for consumer debt relief

Two writers for Reuters penned a piece today proposing a program of debt forgiveness for U.S. consumers. Arguing the national economy is sluggish due to high household debt — roughly 90 percent of GDP, a decline of 100 percent since the economic downturn began — financial institutions should negotiate deep write-offs and bold holders accept similar monetary losses to encourage Americans to buy more goods, which will ultimately encourage employers to hire again.

Economists and consumer groups aren’t the only parties signing off on the idea.

From the article:

Renowned economist Stephen Roach, currently non-executive chairman of Morgan Stanley Asia, has gone a step further, calling for Wall Street to get behind what others have called a “Debt Jubilee” to forgive excess mortgage and credit card debt for some borrowers. The notion of a Debt Jubilee dates back to biblical Israel where debts were forgiven every 50 years or so. In an August appearance on CNBC, Roach said debt forgiveness would help consumers get through “the pain of deleveraging sooner rather than later.” (here)

[…]

“If there is something constructive that can be done it should be,” said Ash Williams, executive director of the Florida State Board of Administration, which oversees $145 billion in public investments and pension money. “You don’t want to reward bad behavior and you don’t want to reward people who were irresponsible. But if there is a way to do well by doing good, then let’s take a look at it.”

[…]

Kenneth Rogoff, professor of economics and public policy at Harvard University and former chief economist at the International Monetary Fund, has said the ongoing crisis should be called the “Second Great Contraction” because households remain highly leveraged. He says the high level of consumer debt is what distinguishes this from other recessionary periods.

So far, stimulus packages have come in the form of tax cuts, mortgage-relief measures and activities by the Federal Reserve to keep borrowing rates low. But those efforts have been unable to countervail the full effects of the economic downturn.

The 2009 stimulus program has come close to adding or keeping four million jobs — the intended result at the time of law’s passage — but over eight million jobs were lost in late 2008 and early 2009. Road projects and the auto rescue were the chief players in keeping more Americans off unemployment insurance.

Debt forgiveness ideas have been swirling since the recession began. One popular proposal is to allow college graduates to write off their loans, the argument being income not spent on paying down borrowed money for tuition will instead lead to big ticket purchases like cars and homes.

That approach, however, has many economists scratching their heads — most college graduates are higher income earners and are more likely to save than persons who earn less. The best stimulus value involves low-income earners because that cohort spends more of its paycheck on standard goods; crudely, they’re more likely to spend the money a government program hands them.

The Fed, meanwhile, has engaged in monetary policy in an attempt to drive debt down and encourage lending. But with interest rates near zero, the Fed has hit a wall, and appears unwilling to raise interest rates as a way of lowering the unemployment rates. Higher inflation encourages more investment as the rate of return jumps, helping create new jobs.

From Reuters:

Such a measure could help the economy by temporarily allowing greater inflation, reducing the debt burden of businesses and consumers and giving them added incentive to spend by pushing the dollar down.

Read more of The American Independent’s coverage of the Fed, including an in-depth look at the voting dynamics within the Federal Reserve.