Magazine | November 28, 2011, Issue

So You Want Debt Relief?

Let’s stop lending money to OWS

College loans are the big greasy grievance enchilada down at Zuccotti Park, but there’s other debt, too. One young woman was carrying a placard complaining of the $40,000 she owed to her mortgage lender. If I had to guess, I’d have put her at about 27 years old — not a bad age to be $40,000 away from owning a home free and clear, but presumably there are others in worse shape, including those unfortunates who are upside-down on their mortgages. Total outstanding college loans are expected to top $1 trillion this year, making them a bigger burden than is total credit-card debt. But credit-card debt is pretty big, too. The aggregate household debt has been declining a bit since the onset of the 2008 financial crisis, but that’s not the good news that it seems: A closer look at the figures shows that the debt written off to defaults on mortgages and credit cards exceeds the amount by which U.S. households have reduced their debt. That means that all of the debt reduction that U.S. households have collectively achieved has been through default, not through paying down mortgages and credit cards, while those who have not defaulted have been going ever deeper into debt.

According to the Commerce Department, U.S. households saw their disposable income rise 0.1 percent in September — a respectable figure, though hardly one that will set the economy on fire. Unhappily, the same report found that household spending had increased by 0.6 percent, meaning that it is growing six times as fast as household income — a feat that not even the knuckle-dragging miscreants in Congress have managed. The savings rate — which has been negative quite often within recent memory — declined from 4.1 percent of income to 3.6 percent. And that savings is concentrated among a minority of U.S. households: not the wicked 1 percent, but the oldsters. The wealth gap between young and old households has never been higher, and households headed by those 65 and older have on average 47 times the net worth of those headed by people 35 and younger. Occupy Grandma’s house!

Understandably, then, a very large number of Americans, especially the young’uns, feel entrapped by their debts. One sympathizes with their situation, and, happily, there is a relatively easy public-policy solution to this problem: Stop lending them money.

A great deal of the indebtedness of the American people is a result of public policy. There is the public debt, of course — nominally around $15 trillion at the federal level, with trillions more at the state and local levels, and tens of trillions more in unfunded liabilities for government workers’ pensions and federal entitlement programs. Government has contributed significantly to private indebtedness, too: Federal mortgage guarantees contributed to the erosion of lending standards during the housing bubble, and federal college-loan guarantees have contributed to the college-tuition bubble, which finds college administrators jacking up tuition every time Washington makes more money available for student loans, and Washington making more money available for student loans whenever college administrators jack up tuition. Just as bankers have less incentive to apply rigorous credit standards to mortgages they plan to hand off to third parties, bankers who made student loans for years had few incentives to cast a beady eye upon those 18-year-old C-plus students signing up for $50,000 to finance bachelor’s degrees in feminist anthropology. Now that Uncle Sam has made himself a virtual monopolist in the student-lending market (having discontinued the private-sector student-loan program), one might expect that even less reasonable standards will be applied to college loans. That is because, as Sen. Lamar Alexander (R., Tenn.) points out, the Department of Education will be able to borrow from the Treasury at a very low rate and lend the money out at a higher rate, spending the spread on . . . “programs,” meaning paying Department of Education personnel inflated Department of Education wages to do things that the Department of Education wants done, like perhaps initiating programs to extend its monopoly student-loan racket. Too bad the name “Bank of America” is taken.

#page#Government policy also bears some responsibility for high levels of general consumer debt. Because federal policymakers are in thrall to primitive notions about how the U.S. economy operates, every bump in the economic road is met with floods of cheap money and low interest rates from the Federal Reserve, i.e. with a devaluation of the dollar. As anybody who has been in the market for a decent certificate of deposit lately or invested in Treasury bonds will tell you, trying to get a meaningful rate of return on savings in a near-zero-interest-rate environment is really hard. When the prices of real goods are increasing at a higher rate than what you’re earning on your savings, the rational thing to do is to save less — to consume. And Washington loves it when Americans consume — in fact, when consumer spending goes down and the savings rate goes up, Washington starts to freak. To be fair, it is not as though Ben Bernanke had a gun to Americans’ heads forcing them to put unnecessary purchases on their Visa cards, but the government has done plenty to make saving unprofitable and consumption relatively attractive.

‘But consumption is 70 percent of the economy!” the neo-Keynesians protest. That is not entirely true. The consumer-spending category on our national ledger includes a lot of stuff that is not, strictly speaking, what we’re talking about when we talk about consumer spending. For instance, Medicare is in that column. So is Medicaid and other health-care spending, which adds about $2 trillion to the account. So is the spending engaged in by nonprofits, political parties, and the like. Michael Mandel of Bloomberg calculates that real consumer spending amounts to something more like 40 percent of GDP.

Whatever consumer spending amounts to as a share of the economy, we do not need to encourage it, because getting people to consume in sufficient quantities is not the problem — ever been to McDonald’s? Walmart? Tiffany? A household with 600 cable channels? The after-Christmas sale at Saks? Neo-Keynesian sophistry to one side, no man, no household, and no nation becomes wealthy through consumption. We become wealthy through production. And our policymakers get the direction of the consumption-production vector 180 degrees backwards: As Say’s Law teaches us, we produce in order to consume; we don’t consume in order that others may produce. But Washington continues to believe that if it can just goose consumption enough with cheap money and giveaway interest rates, production and economic growth will magically follow suit. You can empirically test that theory by wishing for lunch and seeing how long you remain hungry.

If I want something I can’t afford — say a Lamborghini Gallardo — there are two ways for me to go about getting it. One, I could save up $10,000 a year for the next 20 years, which, at a real return of around 4 percent, should put me in the driver’s seat before I turn 60. Or, we could apply the model that we’ve been using for mortgages and college educations and such: Have the federal government issue me a car loan, or guarantee one on my behalf. Granted, a 20-year loan on a car would be an unusual thing, but if the lessons of Fannie Mae and Freddie Mac and post-bailout General Motors tell us anything, it is that government is capable of engaging in wild financial innovation when it has the will to do so. We stood normal bankruptcy law on its head and kicked it in the groin during the General Motors bailout — a 20-year car note is in comparison practically Calvinist in its propriety. If I should for some reason stop making my Lambo payments, or if I die a pauper (which happens to a lot of Lamborghini owners, I hear), then the taxpayers can eat it. But America will be better off, under the Obama-Reich-Krugman view of the universe, because we will have spurred consumption. (If you’re worried about my having bought an imported car, I will, as a concession to you and Pat Buchanan and the Cro-Mags down at the UAW, take a Saleen S7 instead, although it is more expensive — but what’s another $100,000 when you’re buying American?)

#page#It sounds silly in the specific, of course — and it would be silly. But how is it any less silly in the general? We subsidize consumption beyond our means by keeping interest rates artificially low and by offering other incentives, such as loan guarantees, to finance the purchase of politically favored goods, such as houses and college educations. Homeownership and education are the cute warm puppies of politico-economic rhetoric. Who could be against home and hearth and educating the children? Anybody with a lick of sense, that’s who: Houses are not always good investments, for the homeowner or for the taxpayer-guarantor; college educations are not always good investments, either — go down to Occupy Wall Street and ask a few of them if their four to seven undergraduate years were worth the hit. Or, better yet, engage one of them in five minutes’ worth of conversation and see if you can detect any evidence of $50,000 worth of learning.

So, let’s do the 99 percent a favor and give them what they want: a life free of debt. There are some good ways to do that.

The first would be to stop subsidizing mortgages and encouraging homeownership. No more tax-credit welfare for McMansionistas making high mortgage-interest payments. If you want to reform the mortgage-lending industry, may I suggest (as I often suggest) the Texas model? Texas didn’t have much of a housing bust, because Texas didn’t have much of a housing boom. And that is because Texans, contrary to the impression we sometimes give, are capable of learning from our mistakes. Texas had a real nasty real-estate boom-and-bust episode a generation back and, as a consequence, adopted laws that make it really, really difficult to write a mortgage or home-equity loan in excess of 80 percent of the value of the property. That means 20 percent down payments — real money, not theoretical money. Unemployed illegal aliens with no documentable income do not typically have 20 percent to put down, even in a place like Muleshoe, Texas. That’s not to say there were no “liars’ loans” in the Lone Star State, but you either have 20 percent down or you don’t. Keeps a lot of bums out of the market. And with a minimum of 20 percent equity in your house, you’re unlikely to end up upside-down on your mortgage. Win-win.

There’s real macroeconomic benefit to be had from this. A study from the Federal Reserve Bank of San Francisco tracked the household-debt levels of counties across the United States in the years leading up to the financial crisis — which was, as the Fed study notes, “preceded by the largest increase in household debt in recent history.” You will not be surprised to learn that those counties that saw the steepest increases in household debt fared the worst in the subsequent recession, and that those with the lowest increases fared the best. Debt forecloses options. Cash is king.

So, let’s have Texas-style 20 percent down payments from sea to shining sea. It’s not a libertarian utopia, but it beats the heck out of Dodd-Frank.

College loans are an easy fix, too: Government should stop making them, and stop guaranteeing them. This would put serious downward pressure on college tuitions, would make the families of marginal students think twice about spending fifty grand or a hundred grand, and, perhaps, would strike a blow against the nefarious idea that a bachelor’s degree is the ticket to a productive life and a remunerative career. As a few observers have noted around these parts, what a B.A. really does is signal to an employer that a candidate has a certain minimal level of competence — he can show up on time to appointments for four years and follow instructions. (Anybody who thinks a B.A. certifies a certain level of smart is certifiably not.) Employers probably would be better off administering IQ tests (currently illegal) and hiring candidates on a six-month trial basis to screen them for honesty and dependability. No B.A. required, and no $50,000 loan required, either.

Those are specifics. Big-picture, what government can and should do, over time, is raise interest rates. Raising interest rates makes saving more attractive and consumption less attractive. Saving is the source of investment, which is the source of productivity, which is the source of wealth, economic growth, and jobs. A strong dollar and a T-bill that is paying real rates are of little interest to Washington, of course: Being the biggest debtor on God’s green earth, Congress has every incentive to run the other way at maximum velocity, shrieking in terror. But people get rich by saving their money, not by spending it. Countries, too.

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