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The Real Bailout Needed is a Consumer Bailout

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The economic disaster that I predicted back in April of 2008 in these articles click here and here is here. What enabled me to predict what was coming was my evaluation of five key areas of the economy. They are:
 
1. Consumer savings and spending/ability to spend
2. Corporate income, health and spending/ability to spend 
3. Government financial health and ability to spend
4. The lending and banking (and financial) system and its ability to extend credit
5. Inflation & scarcity of resources
 
I made the point that for the first time in American history, all five of these areas were problematic.
 
Looking at the same indicators now, eight months later, there are some real and some apparent changes. Number 4 - The lending, banking and financial system has been bailed out, but it is still reeling from the Lehman brothers’ bankruptcy, several bank failures, and the threatened failures or near failures of several more institutions. On the surface, Number 5, Inflation & scarcity of resources seems have improved. Indeed several news reports have suggested that Deflation is what is now the concern. This is an illusion.
 
The two main commodities driving up prices were energy and food, both because of supply fears. Both have come down in price/cost somewhat, energy in particular, but WHY have they come down in price. Is there suddenly more supply? No, there is no more supply. They are down due to a temporary decrease in demand. As soon as there is the beginning of a return to economic normalcy, and people start to use the additional income to consume, the price increases in both food and energy will return. The governments of the world should take NO action to try to deal with the apparent but temporary deflationary conditions.
 
Having stabilized the financial system and the auto industry with bailouts, the government should turn to the most critical economic issue, the one that really is threatening to make this a prolonged downturn and that is consumer savings, huge consumer debt and resulting inability for consumers and households to spend and buy goods and services. Businesses cannot survive without the consumer and yet the average household is completely broke and drowning in debt.
 
I conceived the idea for this article about a week ago and was dreading having to perform the requisite research into the actual numbers supporting my positions. Thankfully, another author on OpEdNews, 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.
 
This suggests several conclusions. First, as I said earlier, the consumer is too deep in debt to be the engine that this country needs to drive the country out of the recession/depression. Second, without intervention, consumer debt will stifle the country's productivity and economic growth for the next 5-10 years. Third, if the consumer is the main force that drives the economy and affects whether the economy grows or contracts (recession), but the consumer cannot power the economy because they are in debt, something has to be done to fix that. It's a slight alteration of the old Sherlock Holmes quote, "when you have eliminated the impossible, whatever remains, however improbable, must be the truth?”. Turning the economy around with a broke consumer is impossible, so what remains? Bail out the consumer.
 
What would a Government Bailout of the Consumer Look Like?
 
The government bailout of the consumer that I am proposing dwarfs all other government bailouts to date. It probably is the largest government spending initiative by any measurement in the history of humankind. It involves the government offering to each consumer and household to pay all of their debt. In exchange, the consumers who agree to be bailed out will pay the government .125% more of their income in taxes each year for three years for every unit of debt that corresponds to one percent of their annual income up to a maximum of 12.5%. Let me illustrate:
 
Joe and Sally have a combined income of $100,000 per year. They have $60,000 in debt. They opt for a complete bailout of their debt. In return, they will pay an additional (60 x .125)% or an additional 7% in taxes for three years. So, the Government pays out $60,000, the government gets back $21,000 over three years (7% of Joe and Sally's $100,000 a year income or $7000 for three years), and Joe and Sally are debt free.
 
Another example is John. John makes $60,000 per year and has a mortgage of $150,000 and other debt of $8,000 of which $6,000 is taxes and $2000 is credit cards. John opts for the total bailout. The Government pays $158,000 and wipes out John's debt. John owes the government $7,500 additional in taxes each year for three years, or $22,500. Even though the Government paid more to bail John out, the payback is capped at 12.5% in additional taxes per year for three years.
 
There is another component to my proposal. The Government will pass legislation limiting the amount of credit that can be granted to consumers by percentage of annual income and type of debt so that the country will not again find itself in a position where a huge percentage of consumers are over leveraged. The government would also make it illegal to charge the kinds of percentage rates on credit cards we have seen in the past. Also, for those opting for the bailout, any negative reports on their credit ratings would be wiped clean.
 
The total potential Government bailout outlay is the total of household debt or $15 Trillion Dollars. Actual bailout total will be lower because although many consumers would opt for this bailout, many others would not depending on each households circumstances, so the total amount that the Government would put out would be considerably less than $15 Trillion, but it would not surprise me to see the amount exceed $5-8 Trillion, financed by Government bonds. The Government would get a percentage of that back in the temporary additional taxes I proposed, probably between 20% and 30% over three years. So, assuming that the Government outlays $5 Trillion for the bailout, it would get back $1 to $1.5 Trillion.

What everyone should understand is that in exchange for the government spending that money, we would have an American consumer that was essentially out of debt and per the additional legislation would never again get in debt to the point that the indebtedness would endanger the whole country's economic health. Households would be able to spend money again, and all of those businesses that currently hold consumer debt accounts would receive a sudden and massive infusion of cash and would be paid for all of that debt. The totality of this program would result in a massive boost to the economy. Considering this, even the money that the Government would not receive back from consumers that it bailed out, it would likely receive back and more from the money that it injected into the economy generating business, income and retail taxes. Another great benefit of a consumer bailout is the mortgage crisis would be over. Households would own their homes free and clear and the banks would have been paid in full. Other organizations like Visa would be back in good financial health. Visa is currently hurting and requesting government assistance. Helping the consumer as I have outlined is the right way to help banks, business and the financial industry and the economy at large. Everyone wins this way.

 

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A political blogger for the International Business Times, Steve Leser is a hot national political pundit. He has appeared on MSNBC's Coundown with Keith Olbermann, Comedy Central's Daily Show with Jon Stewart and Russia Today's (RT) Crosstalk with (more...)
 

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The govt should have begun by eliminating the Fede... by Jason Paz on Saturday, Dec 27, 2008 at 8:54:29 AM
It is obvious that neither one of you, Leser, nor ... by William Whitten on Saturday, Dec 27, 2008 at 5:11:25 PM
I can see some components of this as helpful in or... by John Sanchez Jr. on Saturday, Dec 27, 2008 at 8:57:02 AM
legislation that would prevent this from happening... by Steven Leser on Saturday, Dec 27, 2008 at 9:02:29 AM
Why not just get the various governments together ... by billiam on Saturday, Dec 27, 2008 at 10:49:18 AM
the banks, the credit industry, the insurers, the ... by Steven Leser on Saturday, Dec 27, 2008 at 2:45:38 PM
would be the proscription of banks issuing NINJA (... by John Sanchez Jr. on Saturday, Dec 27, 2008 at 11:18:52 AM
If legislation is passed to keep consumers from ov... by Chester Marzolf on Monday, Dec 29, 2008 at 3:06:21 PM
The government could hire 5 million people at $20,... by Gallaher on Saturday, Dec 27, 2008 at 9:36:57 AM
$20K per year. It depresses me to think that peopl... by Steven Leser on Saturday, Dec 27, 2008 at 2:47:11 PM
No you will not be living the "high life"... by Gallaher on Saturday, Dec 27, 2008 at 5:59:10 PM
and I spent another 9 months earning less than 20K... by Steven Leser on Saturday, Dec 27, 2008 at 6:04:07 PM
...to support a family of 7, though...... by Jill Herendeen on Sunday, Dec 28, 2008 at 2:08:58 PM
Why do you think we went into such debt?  Bec... by Jill Herendeen on Sunday, Dec 28, 2008 at 2:06:06 PM
Steve, The problem with so many that are speaking ... by Chester Marzolf on Monday, Dec 29, 2008 at 3:11:38 PM
STEVEN great article and the past one to, but what... by MARGARET BASET on Saturday, Dec 27, 2008 at 9:49:28 AM
click here... by MARGARET BASET on Saturday, Dec 27, 2008 at 10:02:20 AM
While on the simplest of levels this would solve t... by Ann Kramer on Saturday, Dec 27, 2008 at 9:59:50 AM
Why does this wastefull country that has spent all... by Markageloo Breza on Saturday, Dec 27, 2008 at 10:04:08 AM
your comment is useful how again?Thanks, but I am ... by Steven Leser on Saturday, Dec 27, 2008 at 10:42:59 AM
As dumb as the bank bailouts have been, this is an... by Tom Dawson on Saturday, Dec 27, 2008 at 10:08:17 AM
through increased taxes on those who accept a bail... by Steven Leser on Saturday, Dec 27, 2008 at 10:41:34 AM
Since this whole thing is utter gibberish--I can&#... by William Whitten on Saturday, Dec 27, 2008 at 5:22:04 PM
Of the money we have seen thrown around thus far l... by Sherry Jansen on Saturday, Dec 27, 2008 at 10:44:03 AM
We need to stop buying and producing and importing... by Davaru on Saturday, Dec 27, 2008 at 10:56:20 AM
There are those in this country that have consiste... by August Adams on Saturday, Dec 27, 2008 at 11:01:52 AM
It punishes no one.There are those in this country... by Steven Leser on Saturday, Dec 27, 2008 at 2:37:39 PM
I think the whole idea of creating an "econom... by August Adams on Saturday, Dec 27, 2008 at 4:44:49 PM
we still need the bailout otherwise a complete col... by Steven Leser on Saturday, Dec 27, 2008 at 5:59:30 PM
I know a lot of people that have been thrifty.They... by August Adams on Saturday, Dec 27, 2008 at 6:48:37 PM
I encourage you to read Riane Eisler's book, R... by Ann Kramer on Saturday, Dec 27, 2008 at 6:38:01 PM
I'll order the book... ... by August Adams on Saturday, Dec 27, 2008 at 6:52:48 PM
as living entities consume. They consume food and ... by John Sanchez Jr. on Sunday, Dec 28, 2008 at 7:32:53 AM
Here we go again, bailing out the credit industry,... by dumpthedlc on Saturday, Dec 27, 2008 at 12:20:06 PM
it is a bailout of EVERYONE starting with the ever... by Steven Leser on Saturday, Dec 27, 2008 at 2:38:48 PM
"I made the point that for the first time in ... by William Whitten on Saturday, Dec 27, 2008 at 5:45:10 PM
nor did you address the main point of the article.... by Steven Leser on Saturday, Dec 27, 2008 at 6:00:40 PM
The Thread is about the economy. My comments are a... by William Whitten on Saturday, Dec 27, 2008 at 6:26:04 PM
If the American people ever allow private banks to... by William Whitten on Saturday, Dec 27, 2008 at 9:36:31 PM
We the People are paying off the credit card ... by dumpthedlc on Sunday, Dec 28, 2008 at 11:40:18 AM
If you only pay people enough to get rid of their ... by Jill Herendeen on Sunday, Dec 28, 2008 at 2:20:55 PM
Right on dumpthedlc !  Your reasoning makes t... by Simple Truth on Saturday, Dec 27, 2008 at 12:32:07 PM
To say that using the handful of obvious indicator... by mike montagne on Saturday, Dec 27, 2008 at 1:46:29 PM
... so if you are telling me how I did NOT do some... by Steven Leser on Saturday, Dec 27, 2008 at 2:43:05 PM
Lesser,If you want to be "on top" of you... by William Whitten on Saturday, Dec 27, 2008 at 5:03:31 PM
Give it a rest. Communism. You accuse me of not kn... by Steven Leser on Saturday, Dec 27, 2008 at 5:54:23 PM
Go talk to daddy again Stevie, maybe he will take ... by William Whitten on Saturday, Dec 27, 2008 at 6:14:34 PM
"Money", by this term we can mean two th... by William Whitten on Saturday, Dec 27, 2008 at 6:41:41 PM
Right in this same issue of OEN is an article by J... by William Whitten on Saturday, Dec 27, 2008 at 10:14:50 PM
Largest transference of wealth from public to priv... by Amanda Lang on Saturday, Dec 27, 2008 at 5:40:33 PM
and that is another reason for bailing out the con... by Steven Leser on Saturday, Dec 27, 2008 at 5:55:52 PM
So, you think if you are fired from your job tomor... by Gallaher on Saturday, Dec 27, 2008 at 6:04:58 PM
... help me out. I have no idea what you are talki... by Steven Leser on Saturday, Dec 27, 2008 at 6:23:31 PM
"what will the few really own if no one else ... by William Whitten on Saturday, Dec 27, 2008 at 7:18:13 PM
The credit card companies are in the business of m... by STEVE RISK on Saturday, Dec 27, 2008 at 7:57:00 PM
You predicted the collapse in 2008?  LOL ... by Steve Consilvio on Saturday, Dec 27, 2008 at 8:27:45 PM
We need better representation than just a rip off ... by STEVE RISK on Sunday, Dec 28, 2008 at 4:35:48 AM
President-Elect Barack Obama has chosen, mostly, W... by Helen Bean on Saturday, Dec 27, 2008 at 8:57:24 PM
Who do you think the 'moneyed interests' a... by Steve Consilvio on Saturday, Dec 27, 2008 at 10:28:03 PM
We get Southerner James Carville again!!! Kind of ... by STEVE RISK on Sunday, Dec 28, 2008 at 4:55:14 AM
Well, your post generated many useful comments and... by TomK on Saturday, Dec 27, 2008 at 10:25:31 PM
on target.............the rest are still blinded b... by Ernest on Sunday, Dec 28, 2008 at 12:40:47 AM
In regard to predicting the financial calamity tha... by Bryan Emmel on Sunday, Dec 28, 2008 at 1:50:06 AM
than the Oil and Banking Scams.......all owned and... by Ernest on Sunday, Dec 28, 2008 at 4:27:16 AM
What you seem to miss here, is that the term "... by William Whitten on Sunday, Dec 28, 2008 at 4:11:55 PM
Technically, money isn't real, so you can'... by Steve Consilvio on Sunday, Dec 28, 2008 at 8:05:35 PM
We are actually a Fascist nation... individuals me... by Dennis Kaiser on Sunday, Dec 28, 2008 at 7:52:20 AM
So the USA took a gamble & lost,alot.  No... by Markageloo Breza on Sunday, Dec 28, 2008 at 1:40:15 PM
A father has made some money from his speculations... by Markageloo Breza on Sunday, Dec 28, 2008 at 2:14:00 PM
Your proposal, I think, fails to address a large s... by Sherwin Steffin on Sunday, Dec 28, 2008 at 4:20:33 PM
I have an income and mortgage debt similar to &quo... by Maxwell on Monday, Dec 29, 2008 at 9:52:18 AM
Are you familiar with the programs developed by Jo... by siriusss on Monday, Dec 29, 2008 at 11:20:26 AM