The Real Bailout Needed is a Consumer Bailout - Part 2

Those with variable incomes and net worth below $250K should have their debt totals determined by the following

Take the mean and median of their last 48 months worth of income and apply the 10% consumer debt limit to whichever figure is smaller..

Inflation is a concern, but I believe the risks can be managed. The bailout would be financed by issuing more bonds and as I already wrote, would be almost completely paid back either directly or by its effects on the economy. This bailout would not be financed by printing money.  The Fed would have to be involved and would probably have to raise interest rates concurrently to ward off inflation. If you listen today to the government, the fed and private groups, they are all saying we are in a dangerous Deflationary situation. I still think there are inflationary risks with food and energy if we start to consume in similar quantities as prior to the beginning of the current crisis, but as I said I think this can be managed..

It seems that everyone wants to punish someone and everyone forgets that if we set out to punish people instead of focusing on what is going to fix this economy, we all will end up suffering for it. Libertarians want to punish the households and consumers who borrowed too much, Progressives want to punish the banks and consumer finance industry, Republicans want to punish organized Labor. For the current crisis to happen it required mistakes by consumers/households, banks, credit card companies, those who provide the underlying securities and financing for banks and credit card companies (the bond market, etc) and the government for failing to oversee all of the above and take action when things trended the wrong way. Now is not the time to concentrate on blame and recriminations. In fact, my bailout proposal bails out everyone, which is one of the reasons it has been a lightning rod for criticism. Everyone's pet economic and ideological whipping boys are helped.

We need everyone to have a 'Jeffersonian Louisiana Purchase' moment. What I mean by that is you have Jefferson, who was in his time probably close to what a Libertarian is today and believed that the government only had a the smallest amount of powers, i.e. only those specifically outlined in the constitution and no more. He did not believe in the elastic clause, and he definitely did not believe what his ideological opposites did, that if the Constitution did not explicitly forbid the government from doing something, that the government could do it.

Jefferson was given an opportunity to purchase the Louisiana territory from France but the problem was that the Constitution did not explicitly give him the power to make that deal. Recognizing that the purchase would solve several strategic issues for the country, not to mention more than double its territory, Jefferson made the deal. The point of this long-winded anecdote is that we are in an emergency. Exigency dictates that we accept that we may need to look beyond what would normally be the boundaries of our ideology to resolve the situation

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What I did not hear from those who criticized the idea is any alternate solution that resolved the current crisis and certainly none that addressed the issue of the overwhelming number of US households drowning in debt. Indeed, those who criticized the idea of bailing out consumers never acknowledged the seriousness of the household debt situation. As I wrote in the first article:

James Quinn, wrote an excellent article that completely outlines just how terribly in debt the American Household now finds itself titled "The Great Consumer Crash of 2009."  Among his research, he found that "Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that mortgage debt." He also had a chart that showed that the average household debt per person in 2007 was $47,000. As staggering as those numbers are, that was a year ago. It is likely that total household debt is now up to $15 Trillion Dollars.

Before thinking about the economy in terms of the overwhelming debt of the average household, I thought that infrastructure spending was the best way to pull the economy out of crisis. The adding of jobs and putting people back to work that would be accomplished by infrastructure spending is great. This does not address the debt issues, however. The unemployed would then be able to pay their rent/mortgage and try to keep up with payments on whatever debt they have, but there will still be little of the spending that is needed to fuel a recovery. I think the infrastructure-spending plan alongside a consumer bailout is a good idea, but by itself, it is going to make very little difference. This economy is going nowhere if we fail to address household debt.

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