How about Economic Stimulus which actually gets paid back?

May 22nd, 2009 by Paul Tousignant (Tooz)

How about Economic Stimulus which actually gets paid back?

Increase families’ disposable income by $200 - $300 per month

What is needed: Consumers need cash, banks need money to lend

How to do it: Transfer credit card balances to future income tax refunds.

Supporting facts:
The average American has close to $10,000 in credit card debt, paying $200 to $300 in monthly payments.
Credit card debt in the US totals close to $1 trillion.
Credit card defaults are on the rise – the New York Times reported on 05.10.09 that defaults could total $80B to $180B by the end of 2010.

Benefits:
Consumers free up $200 to $300 per month, which will be spent to bolster the economy, and/or which will enable house or car payments to be made, or bankruptcy to be avoided.
Banks will get credit card debt paid off, providing funds for more lending and reducing customer defaults, which will boost the economy.
The Treasury will be paid back with interest, making this stimulus possible with no increase to the national debt over 6 years.
Criminally high interest rates which contribute to the number of defaults are replaced with reasonable, more affordable rates.

How:
Consumers fill out and send a “balance transfer” form to the IRS, just like they would when switching credit card companies.
The IRS sends a check to the credit card company.
Consumers will pay 1/6 of the total plus annual interest with annual income tax refunds.

Limits:
The government can charge 5% to 6% interest.
The government can make the debt immune to bankruptcy.
Require the payments back to the government to go to pay back the money borrowed for the program.

Suggestions:
Limit the program to $100 to $200 billion in the first year, offer for the next 2-4 years.
Charge no more than 5% to 6% interest.
Start as soon as possible!

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14 Responses to “How about Economic Stimulus which actually gets paid back?”

  1. al lewis Says:

    good idea! might be some logistical issues. let me propose a related idea: you can pay off your CC debt with your 401K provided you then repay the 401K with a similar monthly payment.

  2. Tooz Says:

    That’s not a bad idea, but contrary to the goal I proposed. If you eliminate monthly payments of $200-$300 per month, people have money to spend to stimulate the economy (a whole lot more than BHO’s peanuts of $13/week!). It could also make the difference between making car or house payments and not making them - preventing further damage to the economy.

    By transferring balances, consumers avoid paying 20% - 30% in loan-shark type credit card interest rates to banks. It would be better for all involved for people to pay a reasonable rate to the Treasury.

    By using stimulus money, perhaps we wouldn’t have to add $100 BILLION/year to welfare, and the money would be payed back with interest. At 5% or 6% interest, ‘our’ money would earn a direct return that would be applied to the national debt.

    Perhaps it would work if the payment was transferred back to the 401K (or even IRA) from an income tax refund.

    It could be easily done… with the complexity of the existing tax code, what’s one more (relatively) little change?

  3. harvardeconomist Says:

    what both of you are talking about is giving more people access to the government’s cost of capital. As a short-term economic remedy, there are a lot of worse ideas out there (some of them from my own colleagues). I worry about the logistics of the first idea. How would you know how much refund to give someone if they haven’t paid their taxes yet? Maybe the answer is to just pay them half what they got in refund the previous year and then “true it up” when the taxes are filed.

    The second idea has precedent. The government already does let people borrow against their retirement account for down payments on houses.

  4. Tooz Says:

    “… how much refund to give someone if they haven’t paid their taxes yet?”

    The idea is to loan people $10,000 upon request, based on a minimum income ($40K or so). The loan is paid straight to the credit card company, like a balance transfer between credit cards.
    The recipients would pay back $2000/year plus interest over five years, or $1667/year plus interest over six years, deducted from their income tax refunds. People may have to increase witholding, or make up the difference when they file their returns.

  5. Al Lewis Says:

    Isn’t this easier if it’s a loan from one’s own retirement account?

  6. Tooz Says:

    It COULD be - as long as repayment is annual versus monthly. The goal of the idea is to reduce monthly obligations.

    If I could eliminate a monthly payment of $200 - $300, I would have more money to spend each month and/or I don’t have to choose between eating or making my car payment.

    If I could get a loan (regardless of the source) to replace a credit card payment, at 5%-6% interest instead of 23% interest, and pay it back with my income tax refund once per year, I would stimulate my economy. If thousands or tens of thousands or a million people had an “extra” $200-$300 per month, the nation’s economy would be stimulated.

  7. Tooz Says:

    To add a little urgency to the need for this idea:

    from AP (Associated Press) updated 1:33 a.m. ET June 8, 2009

    NEW YORK - Credit card holders who in ordinary years might have used their tax refunds to pay down their balances apparently spent the money elsewhere as the recession deepened in the first quarter.

    That’s one of the conclusions that may be drawn from data showing the delinquency rate for bank-issued credit cards rose 11 percent in the first three months of the year, according to credit reporting agency TransUnion.

    The delinquency rate jumped to 1.32 percent this year, from 1.19 percent in the first three months of 2008, TransUnion said. The statistic measures the percentage of card holders who are three months or more past due on their payments for cards bearing MasterCard and Visa logos, along with American Express and Discover cards.

  8. Tooz Says:

    The news continues to be bad for credit card companies and debtors. This plan needs to be implemented ASAP:

    Capital One credit-card defaults rise in May
    Associated Press, 06.15.09, 10:22 AM EDT

    NEW YORK — Capital One Financial Corp. said Monday that defaults on U.S. credit cards rose in May, but delinquencies slowed for a third straight month.
    In a regulatory filing, the McLean, Va.-based company said the annual net charge-off rate, or the percentage of loans the company believes won’t be repaid to total managed loans, rose to 9.41 percent from 8.56 percent in April.
    Like in April, the May results reflect a change in the way the company processes bankruptcies. Due to an increase in volume in bankruptcies, Capital One extended the processing time so that bankrupt accounts are charged off within 30 days, instead of the previous 2- to 3-day processing time.
    The change improved the charge-off rate by 50 basis points, the company said. Without the new processing guidelines, the charge-off rate would have been nearly 10 percent.
    The rate for loans at least 30 days delinquent improved for a third straight month. The delinquency rate fell to 4.9 percent from 5.04 percent.
    In international card operations, the charge-off rate jumped to 9.77 percent from 8.91 percent in April, while the delinquency rate increased to 6.69 percent from 6.43 percent.

  9. Tooz Says:

    Not to belabor the point, but if people could remove credit card payments from their monthly budgets, they wouldn’t have as hard a time with car payments…
    —————————— From AP:
    Auto loan delinquencies jump in 1st quarter
    Rising figure shows consumers continue to be stressed by recession

    updated 12:13 p.m. ET June 15, 2009
    NEW YORK - Those “green shoots” of economic rebound don’t have very deep roots yet.
    While some economic indicators are pointing to better days ahead, data show consumers continued to struggle to make loan payments in the first quarter.
    The latest evidence showed in the rate of auto loan payments that were 60 days or more late, which skyrocketed nearly 28 percent in the first three months of the year, compared with the same period in 2008.
    Credit reporting agency TransUnion said the 60-day auto delinquency rate rose to 0.83 percent from January through March, compared with 0.65 percent last year. While still relatively low, the rising figure shows that “consumers continue to be stressed,” said Peter Turek, TransUnion’s automotive vice president.
    The increase echoes TransUnion data released in recent weeks that showed sharp jumps in first-quarter delinquency for mortgages and credit cards.
    The rate at which people fell two months behind on their mortgage payments went up for the ninth-straight quarter, to 5.22 percent for the first three months of the year. That’s 62 percent higher than the first quarter of 2008.
    The delinquency rate for bank-issued credit cards rose 11 percent from last year, to 1.32 percent for January through March.
    TransUnion compiles its data by randomly sampling records from its database of 27 million consumer credit reports.
    Taken together, the figures indicate continued struggles to pay household bills as the unemployment rate jumped from 7.2 percent in December to 8.5 percent in March.
    Auto delinquencies did edge down .03 percent from the fourth quarter of 2008 to the 2009 first quarter. But Turek said there is a strong seasonal pattern for late auto payments, and the slight improvement was not as strong as is typical.

    The state with the highest auto loan delinquency is Mississippi, at 1.49 percent, followed by Louisiana at 1.4 percent.
    Of the four states hit hardest by the mortgage meltdown, only California at 1.33 percent and Nevada at 1.28 percent, are in the top five in auto loan delinquencies.
    As with other types of loans, South Dakota and North Dakota have the fewest delinquent auto loans, at 0.34 and 0.35 percent, respectively.
    Meanwhile, as auto sales continue to be depressed, the average outstanding balance on auto loans slipped 1.9 percent, to $12,596 in the first quarter. The lowest average auto debt was in Nebraska at $10,629.
    The overall decline reflects the tight credit market and few loans being made, Turek said, along with a greater reluctance among consumers to take on new debt. From the first quarter of 2008 to the 2009 first quarter, the number of new auto loans plunged 40.5 percent, he said. Meanwhile, the average auto payment fell nearly 9 percent, to $361 from $395 a year ago.
    TransUnion forecasts the rate of auto loan delinquencies will continue to rise through the end of the year, reaching about 1 percent. That’s the same level seen during the 2001 recession, Turek said. The agency also expects mortgage and credit card delinquencies to continue rising through the end of 2009.

  10. Tooz Says:

    It’s getting worse and will continue. The time for action is now!

    Consumers fall behind on loans at record pace
    More fallout from a still deteriorating housing market

    updated 9:11 a.m. ET July 7, 2009
    Soaring U.S. unemployment and a shrinking economy drove delinquencies on credit card debt to an all-time high in the first quarter as a record number of cash-strapped consumers fell behind on their bills.
    Fallout from a still deteriorating housing market caused the rate of consumer loan payments at least 30 days late to rise to 3.23 percent in the January-to-March period from 3.22 percent in the 2008 fourth quarter, the American Bankers Association said.
    Delinquencies were the highest since the ABA began tracking the data in 1974. Late payments on home equity borrowings set records, rising to 3.52 percent from 3.03 percent on loans and to 1.89 percent from 1.46 percent on lines of credit.
    The overall delinquency rate actually understates consumer pain because it excludes bank-issued credit cards, where credit deterioration was severe.
    Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter. The rate of delinquent accounts rose to 4.75 percent from 4.52 percent, near the record 4.81 percent in the spring of 2005.
    “The biggest driver is job losses,” ABA Chief Economist James Chessen said in an interview. “When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we’re going to see higher job losses in the next year, and I expect elevated delinquencies.”
    The ABA represents most large U.S. banks and credit card companies. Tuesday’s data are a bad sign for them as they prepare to report second-quarter results starting next week.
    While improved capital markets may boost the bottom lines of some, analysts expect lenders such as Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Capital One Financial Corp. and American Express Co. to suffer higher credit losses, especially in cards.
    Bridge to employment
    Borrowers are struggling as the nation’s jobless rate sits at a 26-year high of 9.5 percent, with 6.5 million jobs having disappeared since the recession began in December 2007. The Obama administration expects the unemployment rate to hit double digits before declining.
    U.S. consumers ended March with $939.6 billion of revolving credit outstanding, a rough approximation of credit card debt, according to Federal Reserve data.
    “Consumers tend to rely on credit cards as a bridge to cover their daily needs until they find new jobs,” Chessen said. “It’s taking longer to find those jobs.”
    Meanwhile, home prices are down 32.6 percent from their peak in 2006, according to the Standard & Poor’s/Case-Shiller Home Price Indices of 20 large metropolitan areas.
    The ABA in June said it expects the recession to end this quarter, despite rising unemployment.
    Click for related content
    Economists point to rising debt as next crisis
    The overall ABA delinquency rate includes direct auto, indirect auto, closed-end home equity, home improvement, marine, mobile home, personal, and recreational vehicle loans.
    Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.
    They fell to 3.42 percent from 3.53 percent on auto loans made through dealers, to 2.04 percent from 2.35 percent on marine loans, and to 1.46 percent from 1.75 percent on property improvement loans.

  11. marvin Says:

    The current bailout plan the Obama administration has somehow contribute in lessening the effects of economic global crisis to everyone. Maybe in due time, the economy will bounce back to where it should be.

  12. Tooz Says:

    I think you are giving too much “benefit of the doubt” to Obama on this. He promised unemployment wouldn’t go above 8%, it’s 9.8%. He promised to “save or create 3 million jobs”, we haven’t seen any of that. He and his demoncrat cronies in the Congress have spend more money than all other previous presidents combined - for what? He said the 10-year deficit would be $7 trillion - it’s projected to be $9 trillion - who is going to pay for that? We are, our children are, our grandchildren will - with higher taxes and high inflation.

    You said the bailout has somehow contributed? It would have been better to do nothing - the economy would have healed itself at least this much.

    BHO and the demoncrats need to be fired!

  13. Clair Says:

    Tooz, Quit making stuff up. Show me the direct quotes where Obama “promised unemployment wouldn’t go above 8%” etc. Why don’t you try to help with the answers instead of being a spoiled brat and dumping over the whole chess board.

  14. Tooz Says:

    Clair - how’s that kool-aid you’re drinking? You sound like a typical liberal that has to resort to name-calling because you don’t have any actual objections left to the truth.

    Here - read (or get someone to read for you) a couple articles that quote BHO and his administration talking about 8% unemployment; statements used to pass the ridiculous, wasteful, dishonest stimulus bill.

    http://blog.heritage.org/2009/09/04/morning-bell-president-obamas-failed-stimulus/#

    http://www.time.com/time/business/article/0,8599,1910208,00.html

    Now take you ball and go back to your own playground - leave the serious discussion to the adults.

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