Credit and Collection News : A Division of Elsos



Feeling Rich vs Being Rich

posted on 2010-07-15

 By Dan Cofall

Editor's Note: Dan Cofall is the co-chairman of NorAm Capital Holdings, Inc. He also hosts a radio show call "The Wall Street Shuffle" on CNN 1190 am from 4-6 pm. 

Peak lifestyle. It's a simple phrase that we use to describe what will happen to the average American taxpayer on or about January 1, 2011. Inflation-adjusted wages are actually down slightly from 2000. Consumer credit has been on the decline for months. Wages are stagnant and are likely to remain so due to globalization and austerity plans. Unemployment is unquestionably not under control. Everyone except the government knows there's real inflation.

In less than two years, our government has nationalized health care, home loans, and student loans (no need to make the case about the auto industry). Investment banks have become commercial banks and they've become wards of the State. New regulations will suppress payday loans, title loans, property tax loans, and just about every other form of spontaneous consumer credit. Interest rates will be capped and unintended consumer credit "fiscal redlining" will again become a reality. Under the Dodd-Frank Act, the Treasury and the Federal Reserve are to be tasked with "managing" virtually every piece of our financial world.

Yet, it appears that all or most of the "Bush" tax cuts are set to expire this January, the Alternative Minimum Tax will burden nearly 30 million Americans, "Cap and Trade" will raise our utility costs and we'll be paying for nationalized health care three years before we receive any benefit from it (using that "benefit" term quite loosely). Assuming no further changes, Americans won't only feel poorer, they will be poorer. Disposable income will disappear faster than character witnesses at a Congressman's ethics trial.

Yet, there are three things I feel fairly certain are close to immutable facts.

Fact one: Politicians and bankers (including central bankers) want to remain employed.

Fact two: Congress's appetite for new public spending is virtually nil.

Fact three: Consumers don't want, but they'll need, more credit.

So, if you're the president, what do you do about this unfortunate confluence of declining disposable income and the unquenched desire to continue to stimulate the economy? May I suggest that our president is likely to nationalize the consumer credit industry?

He'll find this scenario unimaginably appealing. Here's my plan: Each "too-big-to-fail" commercial bank will issue credit cards to every "worthy" American. These credit cards will be issued by the banks but the debt will be backed by the full faith and credit of our country -- a guarantee only, with no real need to even push a button and create more inconvenient debt. The Treasury won't need to actually borrow more money, at least not initially. Capital is available at virtually zero cost today anyway, courtesy of the Fed. The new spending resulting from this "national credit card incentive" will boost GDP. And this boost to GDP, the president can claim, is even more "real" than the increase in GDP that arose from the government's stimulus funding of "shovel-ready" projects. It's been drummed into our heads that we're a consumption-based economy and that any consumption is good. This will certainly encourage consumption. Don't worry that we'll be buying imported things and creating more jobs offshore. But enough about "US content percentages", where the jobs are, etc. Let's just stoke the fire of consumerism one last time.

Credit will be granted by the banks but under strict governmental guidelines to be developed by handpicked Obama administrators and regulators, assuring credit-based redistributive change with this new credit going to the most deserving first. Notice I didn't say the most credit worthy but rather the constituencies that our politicians most want to curry favor with. Interest rates can be kept low, as the banks are not assuming any "actual" risk for which they should receive compensation. No, they're just the wholesaler and distributor. The government can charge the banks an "administration" fee. This fee will increase government revenues, thereby increasing GDP -- a very good thing in the president's eyes, no matter how or why it happens. Banks can increase their earnings essentially risk-free by borrowing at zero cost, lending at say 20%, paying the Treasury a 5% or so fee, and booking 15% free and clear. I might go as far as to suggest that Fannie Mae (FNM) take over all mortgages and Freddie Mac (FRE) take over consumer credit. We might as well start addressing our stupendous deficit by streamlining the nationalization of our entire consumer credit industry. By golly, we can call it "The Consumer Reinvestment Act", the sister act to the Community Reinvestment Act of 1992, and we won't have to change any of the monogrammed towels at Freddie.

The beauty of this is that it gets money directly into the hands of consumers; the country takes on no new debt, consumption is increased, bankers and politicians are credited with a World Series-like "great save", "Helicopter Ben" earns his name, bankers keep their jobs, and politicians, survivalists, each and all, keep their jobs.

Of course, we know that if a government actuary actually existed, he would say that we're just creating vast amounts of uncollectable new debt and that we should reserve for this eventuality. But, no worries, we don't work that way. That's a problem for another administration. Governmental accounting, such as it is, is all about the P&L, not the balance sheet. Right now, this new credit will make Americans feel richer and it may make them forget about the crippling economic policies and taxes we'll endure. 

Ah, yes, I can see it now. The New Bank of United States, "Black cards" for all. No job -- no problem. Can't pay it back -- refinance it just as we're doing with mortgages. Extend the term to 100 years, lower the rate, defer payments for 12 months… heck, we can keep this going longer than sub-prime, Alt-A, negative am, cash back, teaser rate home loans.

And the really great news -- my company can buy the charged-off debt resulting from all of this largess from the government at about $0.01 on the dollar, if the Fed doesn't beat me to it. 

I await my appointment as the next Presidential Economic Adviser. Shoot… capitalism really is beautiful.