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Why Can't We Bail Out Americans Who Have Overcharged Their Credit Cards?

Name: Daniel Wright
City & State: Meridian, ID

Question/Comment: Sir, I am curious why no one is talking about a sure-fire way to assist over one hundred million Americans and put over one hundred billion dollars back into the economy every month. I am talking about a bail out for credit card debt for every American.

At $860 - 900 billion in credit card debt currently held by about 125 million people, the pay off of this by the Fed would allow for well over 100 hundred billion to go back into the economy each and every month. If we also limited peoples' ability to obtain a credit card for three to five years, it would force Americans to live within their means and just might start to increase their savings.

Paul Solman: Honestly, I thought I'd heard of everything: bank bailouts, investment bank bailouts, Fannie and Freddie bailouts, mortgage bailouts, money market bailouts, torpedoed boat bailouts (oh no, wait, that was World War II). But bailing out every American credit card? Whew. This takes the concept of "moral hazard" to an entirely new level. Or (on second thought), DOES it?

I spent this past weekend at the annual economists convention in San Francisco interviewing, among many others, MIT's Jim Poterba, head of the National Bureau of Economic Research (which is a really big deal in the profession).

I asked Poterba about bailing out the banks without, perhaps, sufficiently punishing the executives who made or condoned all the irresponsible lending. He responded that he acknowledges the problem of "MORAL HAZARD: that people are going to take more risks they would otherwise knowing that there may be a bailout at the end of a really bad run. That's a real problem, and the challenge for a policy maker in this is the trade off: in the interests of sending the message that no one is too big to fail, do we want to impose the pain on the economy in the short run that's associated with letting those failures take place?" For more on this issue, see our piece on Moral Hazard -- and if you're a teacher, the classroom materials we've built around it.

You seem to have anticipated this problem, Daniel. Suspend access to credit cards for three to five years so the moral hazard problem is eliminated, at least for awhile. But is that legal? Enforceable? For the sake of argument, let's say we (as a society) could pull it off. That raises another question: Is it FAIR? You and I, let's say, pay our credit card balance every month. The Squander Bird runs up more and more debt. The government bails out Bird at OUR (the taxpayers') expense? And the more excessive the Bird was, the more we pay?

The reason I give this a second thought, however, is that it's pretty much the same thing we're doing with every other bailout we're making. I feel keenly for homeowners who were conned by fast-talking mortgage brokers and now face foreclosure. I've interviewed some of them. But do they deserve refinancing at half what they so profligately paid for their homes or refinancing loans? Again, at OUR expense. Same for the banks, investment banks, etc., etc. And yet in the one instance where we let a big borrower fail - Lehman Brothers - we seem to have brought the world financial system to the brink of total meltdown.

Those are the issues. I guess we'll all have to think more about them. But I have no final answer. Not sure anyone does.

-- Posted January 12, 2009 | Comments ( ) | Permalink