The Great American Credit Card Debt Foregiveness Program

The Administration has gone to great lengths to put together a package of programs to allow worthy homeowners who are having trouble meeting their mortgages to modify home loans to cut monthly payments. This allows people to stay in houses they might not otherwise be able to afford. Homeowners are not pushed out onto the streets, so the national foreclosure rate should improve as a result. The lower foreclosure activity should put a floor under housing prices. The plan is ingenious even though it has been slow to work its way through he home loan system and take effect.

Critics of the mortgage modification program have made two compelling points. The first is that many people who get resets of their monthly payments still default. That may be because they lose jobs. It may be because their mortgage balances are much larger than their home values and they see no way to ever make a profit from their residences. The second criticism is related to the first. Mortgage modifications do not bring down the balances of the loans; they only bring down monthly costs. Lower balances would at least hold out hope that a home’s value will not be “underwater” and that a mortgage holder would eventually have a house worth more than the loan against it.

The next wave of credit problems hitting the economy, especially financial firms, is credit card defaults. According to Reuters, “delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent.” Default rates tend to track unemployment so the figures are bound to get worse. Banks will be faced with new sets of write-offs. They may even find that their capital bases are being severely undermined, which could cause them to have to raise more money. They may be able to do that in the capital markets. If that does not work, they are faced with another round of huge cost cuts and pan handling to the Treasury and Fed for more loans.

The easy way around the credit card default problem is to set up a credit card payment system similar to the one created for home mortgages. The pool of consumer credit is huge, nearly $1 trillion by most estimates. Cutting the costs of paying back banks could allow financial firms to survive another assault on their balance sheets.

The weakness of a credit card reset program is that people with lower monthly payments might be tempted to spend more freely and increase the amount that they owe. The bad side of that is that their total obligations will rise and they may default at some point in the future as a result. The good side is that a consumer spending more money will help lift the economy. Dropping monthly credit card payments is nearly as good as a tax rebate. Consumers with lower monthly household costs may begin to fell flush again.

Forgiving credit card debt, or at least lowering monthly payments, is a stimulus package all its own. The $787 billion that the government is spending now in the hope of reviving GDP and job creation is not working. The government is better off mainlining the money to the consumer’s credit card.

Douglas A. McIntyre