As the Lesser Depression wanders aimlessly into its fifth year, it is clear that we are caught in a balance sheet recession, brought on by a high level of consumer debt. Too many people spend all their money on living expenses and repayment of debt, with any remaining money going to savings for the increasingly unpleasant-looking future. There is nothing left for the discretionary consumer spending that is necessary to drive recovery. From the very beginning of Obama’s first term, he and the Congress have rejected every action that might have made it possible for consumers to adjust their debts to a sustainable level.
We saw this coming with the defeat of cramdown in Chapter 13 bankruptcy cases. During the campaign, Obama claimed he supported the idea, and the senior Senator from Illinois, Dick Durbin, was an early and vociferous supporter. But the banks didn’t like the idea that homeowners could negotiate a fair price for their homes under the supervision of a bankruptcy judge. Obama didn’t lift a finger, probably too busy worrying about how to cut Social Security and Medicare to balance the budget. Cramdown failed. Since then, banks have run rampant over consumers. They foreclose illegally with false affidavits, forged documents and lawyers indifferent to their participation in fraud. They use similar tactics on unsecured debt. The settlement of foreclosure crimes permits plenty more with no significant recourse.
After the loss on cramdown, not a single step has been taken that would help people deal with their massive piles of debt. In fact, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made things much worse for people. You shouldn’t file for bankruptcy if you don’t have a health insurance. That means you shouldn’t file if you don’t have a job. If you make more than the median income in your state, you have to file Chapter 13 (wage-earners plans).
Suppose you lose your job and get behind on your debt, then finally find a good job. Great. But in Chapter 13, you have practically no discretionary income because you have to pay all of it to banks. And if you make less than the median income, so that you can file Chapter 7 (full liquidation), you don’t have much discretionary money left after reaffirmation of car loans, unadjusted mortgage loans and student debt. So bankruptcy isn’t solving things any more either. Except, of course, for corporate persons, the beloved of Congress and the President.
The plain fact is that banks have too much power, both over the lives of regular people and in politics. It would have been better for all of us to have sunk those toads into the deep blue sea after they wrecked the economy. The surviving operations would have had real incentives to negotiate debt repayment schedules that consumers could manage.
The problem is too much consumer debt: eight hundred or so billion in credit card debt, more than one trillion in student loan debt, another trillion or more in mortgage debt on underwater properties, about one in four homes. The question is who is going to eat the losses on that debt. You can be sure that neither party will lift a finger to help solve this problem. Peter Peterson from the right wing moralist party, and Robert Rubin and the Party Formerly Known As Democratic will see to that. The Finance, Insurance and Real Estate Sector, and the oligarchs that control it, will benefit. The banks will not rest until every last debtor pays every last dime.
Generally, people ought to pay their debts if they can. Generally this is true even when it is difficult. People of all political stripes, and no political stripes, agree with this principle. That is why it was so easy for the cheats and frauds in the FIRE sector and their oligarch owners to kill political action. But this isn’t generally. The plain fact is that millions of our fellow citizens can’t pay, and the power of the oligarchy is hurting all of us.
The Brown-Vitter bill to raise the capital held by the six largest banks is a good first step. It’s also a way to raise these larger questions. We will wander in the economic desert for decades, just like Japan (for different reasons) if we don’t.
Graphic: “Old drawing of the execution of Giles Corey (Sept. 19, 1692) by being pressed with heavy stones for failing to enter a plea to the charge of being a witch during the Salem Witch Trials” via Wikipedia