Commentary: If the government's in the bailout business, what about 'we the people'?
This article first appeared in the St. Louis Beacon: November 20, 2008 - Writing satire in this country is getting to be challenging as the Republican National Committee audits the contents of Sarah Palin's underwear drawer. Or the Bush administration - neo-conservatives who swept into office promising the usual bromides of limited government and fiscal responsibility - saves us from the perils of socialism by urging the Treasury Department to purchase the banking industry.
Where's the restraining hand of the loyal opposition during this episode of monetary madness? They're clamoring to extend the futile Wall Street bailout to Detroit so that the latter can continue to manufacture cars nobody's buying.
How can you succinctly ridicule the transparently ridiculous? Clowns make fun of themselves - they don't need the help of some wise-guy columnist to draw a laugh. Leaving the fate of Gov. Palin's undergarments for another day, it may be useful to examine just how we arrived at this sorry state of affairs.
Dig around the crime scene of any public policy disaster long enough and you can usually find the bloody footprint of Congress somewhere. The present financial crisis is no exception.
In 2005, our representatives in Washington passed new banking regulations that doubled the minimum monthly payment due on credit card balances. This was done to instill responsibility among borrowers by forcing them to pay something toward the principal they owed each month, rather than remitting the outstanding interest and fees and allowing the balance to roll over in perpetuity, as they previously could.
At the time, the proposal sounded reasonable: Who really profits from financial irresponsibility? Turns out we all did.
Things begin to collapse at the fringe, where the most vulnerable reside. The 7 percent or so of borrowers who routinely paid only the minimum due were hit the hardest by this revision. Some were forced into default by the new rates; others simply cut up the cards because they could no longer afford to use them. In either case, they stopped spending.
Because consumer spending accounts for about 67 percent of the economy, any significant curtailment of consumption in one quarter is felt throughout the whole. As demand decreases, so does the need for production. The resultant job losses further constrict demand, making even more jobs expendable and thus creating a downward spiral not unlike the swirling vortex of a flushing toilet.
The following year, Congress compounded the insult by reforming bankruptcy law. Actively sought by the banking industry, this bill made it impossible for borrowers to max out their credit, then declare bankruptcy and walk away from the train wreck they'd caused. You don't have to be a born-again Calvinist to feel moral revulsion for people who intentionally run up debts they never plan to repay. Unfortunately, the new law also made it next to impossible for the overwhelmed consumer to ever re-establish himself in the field of play.
In the past, homeowners could dodge this trap by refinancing their house. This tactic is similar to a castling move in a game of chess: a two-for-one maneuver allowing you to escape desperate circumstances.
To the extent that the average home was accruing 4 percent in value annually, its owner could cash out every so often and use the imaginary money he'd "earned" by living in it to pay off the consumer debts he'd run up by living beyond his means. With his credit balances back to zero, he could then start the process all over again.
That attractive option was taken off the table by the collapse of the housing market -- an event precipitated in no small part by the general economic downturn that preceded it. Indeed, it is now estimated that fully 20 percent of homeowners owe more on their house than the places are worth.
Congress' response to all of this was to rush to the aid of lenders. (Borrowers don't seem to have lobbyists.) It gave Treasury Secretary Hank Paulson, formerly of Goldman Sachs, $700 billion in the hope that he and his golfing buddies could figure something out. So far, the results have been less than encouraging and most analysts agreed that the ultimate tab for this dubious effort will end up being well in excess of $1 trillion.
The AIG Corp., for instance, is now into the public till to the tune of some $150 billion and counting. The only tangible results we've seen from that investment have been a few extravagant outings for the managers who drove the firm to the brink of collapse and $500 million in executive bonuses.
Rather than funding bonuses for people who earned them by securing public rescue for their private misfeasance, maybe we should concentrate our resources where the problem began. Giving money to banks so they can lend it to nonexistent customers or paying Detroit to build unwanted cars solves nothing. The problem is that collectively, the consumer is maxed out.
Americans owe an estimated $900 billion in credit card debt. If the Treasury insists on investing in the private sector, have it do so on Main Street, rather than Wall Street.
Use the bailout money to buy the general credit card debt. This would give the banks fresh liquidity. With their credit card income gone, banks would have to lend this windfall to generate further profit, thus extending consumers newly available credit. Allow each cardholder to repay his balance to the Treasury on an interest-free basis and spread the payments over an extended-year period to keep the monthly installments low.
Out from under his crushing debt, the consumer's newfound purchasing power would reverse the economy's downward spiral. Demand for goods and services would surge, which would create jobs that, in turn, further increase demand.
Of course, none of this is classical capitalism. Then again, neither is government funding for AIG executive holidays. The Treasury holds the public's money, or when borrowing, the public's debt. If we're going to squander its resources, let's at least spend the proceeds on the public.
M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.