I find the graph above, courtesy of the New York Fed via Calculated Risk, pretty evocative. It illustrates total household debt from 1999 to the present broken out into its various subclassifications with student debt added in the two bars on the right. As a sidebar and to place indebtedness into slightly better perspective according to the Department of Education student loan indebtedness has more than tripled since 1999 compared to home loan indebtedness which had just about tripled from 1999 to its peak in 2008.
If, as economist Richard Koo has averred, we are in a household balance sheet recession and that whatever other measures are taken economic growth won’t resume at anything resembling a healthy level until “deleveraging” has taken place, i.e. household aren’t holding as much debt, we may have a very long time to wait. To my untutored eye it appears that indebtedness is moving sideways, like so much else in the economy.
I would also make the claim that efforts to date like the Car Allowance Rebate System AKA “Cash for Clunkers” and the first time homebuyers tax credit are vain attempts at reinflating the bubble, doomed to failure and, in fact, counterproductive while pump-priming measures like the infrastructure spending provisions in the ARA are at best only effective very indirectly. More direct measures, an ocean of alphabet soup of them, e.g. HAMP, haven’t been effective largely because they haven’t attracted lenders to them.
Let’s assume, arguendo, that we are, in fact, experiencing a balance sheet recession which won’t remit until household indebtedness is substantially reduced. What policy measures would effect that? Taking into account the large proportion of household debt held by the topmost quintile of income earners, are these measures likely to be implemented?
I have one more rather argumentative question. Which model comports better with reality? That policymakers have been striving to fix what’s wrong with the economy or that they have been more or less indifferent to what’s wrong with the economy and have been focused like Bill Clinton’s laser on measures that would please prospective contributors and/or voters?
What policy measures would effect that?
Allow student loans to be discharged in bankruptcy, at the discretion of the judge/master.
Which model comports better with reality? That policymakers have been striving to fix what’s wrong with the economy or that they have been more or less indifferent to what’s wrong with the economy and have been focused like Bill Clinton’s laser on measures that would please prospective contributors and/or voters?
I can only assume those are rhetorical questions.
Getting ten million people back to work doing something would be a great start. The upper middle class will benefit as much as anyone from the increased demand coming from full employment and increase their incomes. Suspension of payroll taxes for the next five years would be a significant boost for everyone below them; not huge, but enough to make a difference.
A national program whereby college graduates can work off their loan debt via public service over a pre-determined period of time would, I think, be preferrable to outright forgiveness.
Homeowners? Tell the banks they’re on their own if they refuse to renegotiate and you’ll suddenly see them begging mortgagers into their offices.
I fervently wish that lots of new jobs would be created and the number of people who can’t find work would be substantially reduced. However, given that most of the unemployed weren’t in the same income quintile as those who are the most in debt, I suspect the impact of that on reducing indebtedness would be relatively small.
If we are, indeed, in a balance sheet recession isn’t the main impediment to the economy expanding producing more jobs indebtedness? And measures that don’t reduce indebtedness will at best be short-lived?
Said another way, if you can reduce indebtedness substantially by reducing the number of unemployed doesn’t that ipso facto say that it’s not a balance sheet recession?
A national program whereby college graduates can work off their loan debt via public service over a pre-determined period of time would, I think, be preferrable to outright forgiveness.
What, working as teachers? Yeah, that’ll work as the teachers are getting laid-off in droves. Or perhaps paving roads in national parks with shovels and pick axes.
“Said another way, if you can reduce indebtedness substantially by reducing the number of unemployed doesn’t that ipso facto say that it’s not a balance sheet recession?”
The reason increased employment helps is that it gives unemployed who owe a chance to actually pay it off, and the increased economic activity flows throughout the economy. Trickle-up works a hell of a lot better than trickle-down as low wage earners spend much more of their income and increase monetary velocity. A lot of the upper quintile are self-employed/small business owners who will benefit from increased demand, and the additional income makes it that much easier to deleverage.
Look, there’s no cure-all except for a debt jubilee which
I suspect ain’t in the cards. Getting money flowing again is the best we can realistically hope for because it creates more opportunities to retire debt. It will be a messy process but it will happen.
Bankruptcy:
Repeal Bankruptcy Reform Act of 2005. There is a fed paper that indicates that this Act increased home foreclosures because it eliminated or greatly reduced the ability of bankruptcy to rework mortgages (largely at the expense of unsecured creditors) for upper income households.
I’m willing to be convinced that mortgage cramdown should be an option in bankruptcy, but since that is a concept traditionally applied to depreciating assets like cars, I think the concept may need to be tweaked.
Similarly, I think student loans should be dischargeable under some conditions. The easiest approach would be to set a number of years before its an option.
While I think people who file bankruptcy should face financial repercussions to their credit history, I am becoming concerned about the use of the credit history for non-credit related issues. Bankruptcy is about a fresh start, it shouldn’t be used to deter access to jobs or insurance or whatever is going on.
Foreclosures:
The federal government should put pressure on New York and other states to let the foreclosures go foward. I’m not sure what the best approach is, but I believe banking regulations require banks to proceed promptly through the foreclosure process (the regs differentiate on a state-by-state basis on how many months that should be). I don’t recall if these regs operate through Fannie-Mae or insurance or what. Clearly, you can’t go after the banks for not foreclosing under direct opposition from the state, but whatever that cost should be directed back at the state for the costs it is causing.
Hire some unemployed lawyers for minimum wage, plus student loan credits, to perform basic consumer protection work for foreclosures. They should perform two tasks: (1) check to see that the proper notices have been given, and (2) check the homeowner’s proof that they made twelve months of mortgage payments. File their report with the court.
The reason increased employment helps is that it gives unemployed who owe a chance to actually pay it off, and the increased economic activity flows throughout the economy.
By the time you’ve been unemployed a couple of years, there is no chance you will ever pay off your debt without bankruptcy, and not even then if you’ve got substantial student loan debt. It just isn’t going to happen.
Look, there’s no cure-all except for a debt jubilee which
I suspect ain’t in the cards.
A debt jubilee just exchanges one set of losers for another set of losers. I would be happy with that, as I’d love to shift my losses to the Wall Street Poobahs. But it still leaves heaps of misery in its wake.
Have to agree with PD. Bankruptcy is an integral part of capitalism. When capitalism works, it is destructive. May jobs are destroyed, while jobs are created. We want those who lose jobs to take chances, to take some risks in starting new businesses. By making it more difficult to discharge debt, new business creation is limited not the wealthy, not where start ups really come from. We have come to so heavily favor creditors over debtors that it harms capitalism.
Steve
“By the time you’ve been unemployed a couple of years, there is no chance you will ever pay off your debt without bankruptcy, and not even then if you’ve got substantial student loan debt. It just isn’t going to happen.”
This misses the bigger picture. A dollar used to repay debt to the banking system is a dollar permanently destroyed, taken out of the real economy. Deleveraging creates a net financial drain on the private sector which can only be offset by deficits larger than the drain. A job created is that much more income spent into countering the effects of each dollar in debt retirement, making it progressively easier to retire the next, then the next. Nothing is more important than returning to full employment because otherwise we will not see sufficient economic growth to dig ourselves our of permanent stagnancy. The longer we dither the worse the problem, particularly on the millions of young people graduating into the unemployment line.