I made a comment earlier today in Rep Slaughter's Cap Credit Cards diary. It was an idea I had a while back about how a main street bailout should have worked. I think the time for bailouts like this is past, but who knows... if the right person saw this maybe there is a chance?
The premise of my plan is pretty simple. The US bailed out banks with low interest loans to help them stabilize, recapitalize, stimulate lending, and help cover losses from bad loans. This seems like a trickle down theory.
Instead, perhaps the US could have given us a plan I like to call Debt Reduction And Management for America (DRAMA) instead.
The premise is pretty simple, the US would offer low interest medium term installment loans directly to consumers for the purpose of eliminating high interest unsecured debt.
There would be lots of what ifs and qualifications and details. Some of the major points I think would be important:
Rates and Terms
Loans would have to be long enough (say 3 to 6 years) that the payment would be manageable. But they should not be too long (like 30) so that repayment is never completed. The rates should also be low enough to reduce the burden on the consumer and high enough to cover any eventual defaults.
Credit Status
If someone participated in such a scheme, it would be imperative that they not run themselves into credit trouble again. So in order to participate in the loan program, they would have to agree to close any account paid off through the loan. They would also have to agree not to open any additional credit lines without permission and their credit reports would be flagged as such. In this sense, they would need to be appointed a trustee (like is done with bankruptcies) who would be in charge of their participation and could oversee any credit request. That would allow someone to obtain a new car.
Default
It would surely happen. Any loans issued through this program should not be dischargeable in bankruptcy. The same way as with student loans. And since the US is in charge of tax returns, don't default and then expect a refund...
Education
In order to receive the loan, it should be mandatory for a consumer to participate in some sort of consumer finance class. You know, the kinds of things they used to teach in school. The cost of the program could be included in the loan if necessary.
Goals
The goal with this program is to target all sectors of the economy at once. Congress passed a law that made interest rates go up for nearly everyone. Now many people are struggling with those bills.
Purchasing the debts directly would bring immediate relief to the consumer. Extra earnings from wages would then be available to flow into the economy. It's like a tax rebate without the same cost!
Now before you claim unfair competition, understand that this also benefits banks. This recapitalizes them in the same way that a direct loan could. By purchasing off the debts, we are returning capital back to them that they can then use to (hopefully) lend in a more responsible fashion. Or maybe they would blow it all on bonuses.
It also helps to improve the American consumer reliance on debt. This slightly aged msn article indicates that the average US household has 8000 in credit card debt. We could help people and help break the cycle.
h/t to hkorens
Happy Friday everyone. And don't forget to enjoy the last credit filled shopping weekend before Christmas!