Making Folks Whole

A key feature of the Obama administration’s plan for reviving the economy involves making the banks whole, but what about consumers? As some top economists have been telling us, until the federal help gets down to the household level, it won’t be enough to start the nation’s economic engine.

Much of this unwholeness has to do with credit cards. Comedian Jon Stewart recently proposed that the feds give consumers enough money to pay off their credit card debt. They’d be whole, and the banks would be, too, at least as far as that segment of their balance sheets goes.

But how do you give consumers the money while ensuring they actually use it to deal with their debt? You could offer them a choice: The feds could say, we’ll pay off your credit card, but in return, you agree to hold only a single card with a credit limit of $1,000. Or, the card becomes a charge card only – you have to pay the balance off at the end of the month. Those cardholders with existing credit lines who don’t need the help and want to continue with their card companies could do so under their current terms. Simply put: If you accept government help, you live with the conditions imposed. But you don’t have to accept that help.

This would not preclude the banks from loosening up the restrictions on the bailed-out consumers after, say, one year. But the banks would have to hang on to those deals they make.

The other leg of this stool is revising the whole credit score system so that it’s based on individual creditor performance. A bank’s relationship with the cardholder should be based on that relationship only, not on how that debtor is performing with other creditors. If a debtor accepts direct federal help, perhaps one of the conditions could be the imposition of a baseline credit score, which would go up as the consumer responsibly deals with debt going forward.

Once consumers are made whole, they will resume spending, because they’ll feel better. Will it be at the same level as the old days? No. The nation’s economic engine will be running at much lower RPMs.

But really, would that be so bad? Does reality have to bite?

There, now I’ve said it.