Requiem for the Great Recession

The Great Recession continues to haunt our economy. Although today we see what might be viewed as a return to normality in some sectors such as real estate, banking and the Dow, there is one sector that continues to be mired down and that is consumer spending.

Consumer spending is the economic engine of our economy.  The spark plug of that growth and prosperity engine is the broad middle class.  But, right now those Americans are hunkered down.  They are cautious and worried about paying the bills.  Many are not having an easy time of it.  Very few of the benefits seen in the recovery of the real estate and financial markets have trickled down to these folks.  They are looking for a signal that tells them it is okay to take a deep breath and begin to live normally again.

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What is most worrisome to middle class Americans is the huge overhang of consumer debt, much of which is delinquent.  For perspective, consider this:  The Federal Reserve Bank says that 35 million Americans now have unpaid debts that are so delinquent they have been turned over to collection agencies.  We have no good way to know how many millions more are teetering on the edge of the abyss. 

There is an elegantly simple solution that would address this worrisome debt overhang, kick-start consumer confidence, provide a boost to business and produce a net gain for the national budget.  That solution is the creation of a one-time tax credit that would induce lenders to donate their delinquent consumer loans to qualified non-profit organizations.  In exchange for the donation of a delinquent consumer loan the lender would receive a tax credit equivalent to the fair market value of the donated loan.

By donating delinquent consumer loans to qualified non-profits, lenders not only clear their books of problem debts but receive a meaningful uptick in value through the tax credit.  This is a plus for the financial industry that will stimulate growth in lending activity and benefit the economy broadly.

The consumer’s debt ends up in the hands of non-profits that are specifically tasked to find ways to restructure the consumer’s obligations into a solution that works for all parties.  Think about the concept of the real estate HAMP program – if your mortgage loan is underwater, rewrite the loan to a lower balance and timeline that makes sense.  Same concept works here.  Borrowers continue to pay their debts, just at manageable payments.

At first blush this sounds like a giveaway program.  It definitely is not.  It is merely a reset of the clock that will allow a rational restructure of the debt.  Consumer confidence improves and greater economic activity results.

This is a good deal for both lenders and borrowers.  The rate of consumer bankruptcy filings would be cut in half.  Garnishments and repossessions would fall by 80%.  The number of civil lawsuits will decline by millions.  Almost two million foreclosures would be avoided.  All of these things impose enormous unrecovered costs for businesses and make it even more difficult for consumers to work their way back to financial stability.

This is a really simple proposition.  Without financial stability, the middle class cannot contribute its part to building a robust economy.

We all know there is no free lunch.  There is a cost to this program – but the benefits and budget savings far exceed the cost.

The estimated cost for the tax credit is $6.8 billion.  Some might call that a lot of money, others would recognize it as a rounding error in the scheme of our national economy. It is a pittance compared to the projected $121 billion of economic benefits it will generate.  Beyond the reduction of bankruptcies, foreclosures and repossessions; the resulting increased economic activity will also reduce unemployment, increase total wages paid and result in a significant reduction in the demand for food stamps and unemployment compensation.  All of which will come right off the bottom line of the federal budget.

While the economic benefits outweigh the economic cost by a factor of 17 to 1, the incalculable benefit will be the myriad of societal improvements that are a by-product of a healthy economy.  A decrease in divorce, spousal abuse, child abuse, drug abuse and crime benefit all 320 million Americans, not just the 35 million directly affected by this proposal.

This is a rare opportunity to unshackle and recast the financial future of millions of middle-class consumers, create a boon to banking and businesses, and reduce the net cost of the federal budget.

This will be the requiem for the Great Recession.  May it R.I.P.

Bartmann is the CEO of consumer financial recovery firm, CFS2.  He is a best-selling author and recently published the book Out of Control: Cases of Debt-Collection Abuse in America and What We Can Do About It, which documents patterns of abusive tactics used by unethical collectors.  All proceeds from the book are donated to the National Consumer Law Center.