The growth for our economy since the 80s has resulted from increasing reliance on the service sector of the economy. The increase in the service sector has primarily rested upon consumer spending. The consumer spending has been fueled by credit – mortgages, home equity loans, long term car loans and, of course, credit cards. Everyone has been encouraged to not only spend what they earned but to use credit to mortgage their future earnings to provide an immediate impact on the economy. It is good while it lasts.
Now that we have mortgaged our future earnings to the breaking point what can we do. The world is in a panic because it now realizes that the debt service on past spending will continue to grow and mean not only will the consumers not be able to spend more than what they earn but even the consumer’s earnings will not be available for spending since an increasing portion will be needed for debt service.
The only way to resolve the problem is reigning in the debt and more specifically the cost of that debt to every person who finds themselves owing more on a house than what it is worth, a car payment that is out of line with their income and credit card balances that will take 34-52 years to pay off if minimum monthly payments are made. The only answer is that the debt must be reduced and the cost of repaying the debt must be reduced as well.
In the 2005 debate over so called Bankruptcy Reform, an amendment was offered to limit interest rates to no more than 30% – it failed. (The reasons it failed were astonishing but that is for another time). Consumer bankruptcy comes down to a fight over who gets the consumer’s earnings. With a negative savings rate, the consumer will spend everything he or she earns so the question is who will get that consumer’s money – the prior creditor who advanced credit or the future creditor who wants to make a sale to the consumer. That is the central issue here.
Will the country make some decisions which will limit the amount claimed by the existing creditors by placing a limit on the amount of interest that can be charged for interest (I have seen default rates on credit cards in excess of 45%), over limit fees and various other charges? My belief is that the unregulated charges that have been permitted have caused the “crash” to occur sooner and be more severe than if there had been reasonable limits. It does not matter in determining the solution given where we are now. What does matter is where do we go from here.
The only way this crisis will be resolved will be by limiting what the existing creditors can get from consumers. This will include a need to reduce mortgages to house values to stop the tidal wave of foreclosures causing housing prices to continue a downward spiral. Credit cards will need to pare down debt and by all means have to be regulated to limit interest rates and fees. Without these changes, and allowing past creditors to pursue their claims against consumer’s earnings with unregulated, unlimited fees and costs, we will see a downturn in the economy that will be devastating.