I was surprised to read this:
Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.
The new pilot program — which the banks hope will become permanent — could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent. […]
In an increasingly tough economic climate, banks and other mortgage lenders already have been agreeing to modify loans of distressed homeowners to help them avoid foreclosure. Now, banks making credit card loans have reached a point where they can lose less by forgiving part of the debt than seeing the consumer walk away entirely. [emphasis added]
This is the very first move I’ve read about that I think might actually mitigate the current crisis. Every move up until now has failed to recognize that it is not the terms of the debt that are causing the difficulty, but the size of the debt.
The clearest example is with houses. If I took a $500,000 loan to buy a house which is now worth $250,000, no matter how the debt is refinanced I can’t avoid selling at a loss (i.e. would not be building equity) until I have paid the loan down to $250,000, which could take twenty years. If half the loan amount were forgiven, though, then the balance would match the value of the house and I’d be able to sell the house without taking a loss, or keep it and be building equity as I paid down the loan.
I wish that someone smarter and wiser than me would begin to sort through the moral issues involved in this situation, because I think we should not sacrifice fairness to our belief in an economic system, and it is obvious to me that the outcome has been very unfair to those holding consumer debt, whether on a house that is now worth half the loan amount, or on a college education or vocational training that was grossly overpriced for the benefits it will yield, or even for expensive toys that now can hardly be given away.
If people are so inherently gullible, foolish, greedy, and self-indulgent that they are doomed to ruin their lives when given such opportunities, then it is probably not a good idea to structure a society so that some can benefit greatly by playing on those weaknesses while being legally insulated from the damage they inflict. As to how we go about unwinding this mess so that the damage done is distributed fairly among those who cause it … I’m still waiting on that smarter and wiser person to explain it to me. But forgiving excessive amounts of consumer debt might be a start.