Bankruptcy

Do We Want More Consumer Lending?

By Bob Lawless

Yesterday, Treasury Secretary Paulson announced a major shift in strategy for the federal government's financial rescue plan. Treasury now would make $50 billion available for lending to companies making credit card, automobile, and student loans. The idea is to jump start consumer lending sector, although I am not sure to what end. There is no doubt that the consumer lending sector has frozen up along with the other credit markets. What concerns me is that the Treasury's latest plan seems an attempt to return us to the same policies that got us to where we are today.

For those of us who grew up in the 1970s, the explosion of consumer debt is one of the greatest social shifts for our generation. Our parents borrowed but only episodically. Homeowners planned for a day when they would pay off the home mortgage and perhaps have a celebration where the mortgage document was burned. We were among the first college students who were able to get credit cards, but credit limits were low. As an undergraduate, I remember getting a Visa card so that I would have it for an emergency and being terrified about possibly being responsible for the $500 debt I could incur on it.

We now live in a society where a segment of America is permanently indebted. Although estimates vary, the best available data suggest a little under half of Americans carry a balance on their credit card. Homeowners have borrowed out of their home equity and no longer plan to retire mortgage debt. As a nation, we now over $13 trillion on our credit cards, automobile loans, and home mortgages. Even after adjusting for inflation and the growth in population, that is more than three times the amount owed in 1980.

I am not yearning for the good old days. A lot of good has come from increased access to credit markets. Rather, our borrowing binge always has been unsustainable in the long run, and the long run is here. We tried to have a housing policy on the cheap. Instead of paying to put people into homes, we let them borrow. We tried to have economic growth on the cheap, using consumer borrowing to pay for that growth. After the September 11 attacks, President Bush urged Americans to continue spending to keep the economy strong. The bills have come due for all this borrowing. In the documentary Maxed Out, fellow Credit Slips co-blogger Elizabeth Warren puts it in military terms, asking where is the exit strategy for all this consumer debt? The global financial crisis seems to be the  exit strategy that we have made for ourselves.

With yesterday's news, my question for Secretary Paulson is to explain to us why we need to jump start the consumer lending sector. Sure, no consumer lending at all would be bad, but is that really the concern? Consumer lending has not completely dried up. Consumer loans are just harder to get, albeit much harder to get it in some instances. Why is that a bad thing? Is the Treasury's goal to return consumer lending industry to its go-go level before the financial crisis? If so, do we really want to continue to stimulate the economy with tomorrow's dollars rather than paying for it now? The bill will just come due again some other day. Letting the consumer credit markets to continue to founder will mean that Americans will borrow less, will own less, and will have lower economic growth in the near future. We will have to live in that world unless we want economic growth on the cheap today that our children will pay for tomorrow.

Full post as published by Credit Slips on November 13, 2008 (boomark / email).