National Commentary

Nicholas F. Benton: My Plan for Working Off Household Debt




Now that the U.S. government has moved to take ownership positions in nine major banks, among the next critical steps needed to ease the economic crisis’ recessionary impact on average Americans is to swap household debt relief for commitments to community service and national infrastructure and alternative energy development.

Such a program would not only help stabilize the banking system, but it would offer direct relief to the debt and mortgage-crushed American public, serving as a form of economic stimulus focused on the middle class. It would address the anticipated major growth in unemployment numbers, relieve foreclosure pressures and at the same time help in the effort to refocus the nation’s economic priorities toward new domestic development.

Under my plan, through a clearing house mechanism, American citizens would have the opportunity to pay off their student loans and other debts by signing up for a full or part-time role in a national community service agency, hopefully utilizing their best skills and expertise in a constructive way to augment the domestic economy.

When I presented this idea to key political leaders in Northern Virginia this week, it was greeted as a new idea with considerable enthusiasm. Rep. Jim Moran and the chief of staff to Sen. James Webb offered positive initial responses to the concept. Democratic congressional candidate Judy Feder reminded me that a similar program is already in place for medical school graduates.

That program, the National Health Service Corps, allows young physicians to work off their student loan debt by spending time providing their services in areas where there are shortages of doctors.

Student loans are among the debts that are dragging on the solvency, much less the buying power, of average American households, along with mortgage and credit card debts. The overwhelming burden of consumer and household debts were both allowed and encouraged to snowball in the era of easy money, unregulated and predatory lending practices. That 28-year orgy that seduced far too many to live beyond their means had, in addition to its household debt component, had an even far more toxic derivative component, involving the sale of debt up to 40 times its base value on securities markets.

When the housing market began to cool off, and the initial round of resets on sub-prime adjustable rate mortgages followed, the first wave of foreclosures served as the first detonator of the derivative bubble that ballooned out of control since 2004, when five major investment banks were permitted to increase their limits on leveraging from 12 up to 40 times the dollar value of a base debt instrument.

The real cause of the global economic meltdown, whose true magnitude is still unknown, lies in the mass marketing of these derivatives around the planet. No one knows how many hundreds of trillions of dollars of uncollateralized debt instruments will go up in smoke, despite the coordinated efforts of governments everywhere to underwrite them by propping up their nominal values with public debt.

But while those moves are designed to avoid the collapse of the global banking system, there also needs to be aggressive and unprecedented steps to make sure there is relief where it is needed in average households. Extraordinary steps are needed to help people stay in their homes with a range of forms of debt relief.

This idea of swapping out student loan and some other household debt for community service dovetails with the growing interest in amassing an army of domestic service volunteers in the aftermath of the November election. Moran, for example, in remarks at a fundraiser this week, talked about refocusing the enormous energy of millions of young people who’ve mobilized for the Obama presidential campaign toward fixing the domestic economy.

The new national mobilization should be focused on alternatives to an oil-based national infrastructure, not only by spurring efforts at exotic new alternative energy forms, such as solar and wind, but by prioritizing national rail and water restoration, renovation and innovative development.

Rail delivers both people and products at a tiny fraction of the energy costs of automobiles, trucks and airplanes. Making urban rail systems as efficient as New York City’s, expanding rail routes criss-crossing states and introducing high-speed mag-lev technologies on a large scale is an appropriate focus. Also, water projects, to capture hydro-electric power and better deliver water for consumption, including for agricultural use, should also become a top national priority. Like rail, this involves the rediscovery of what had become forgotten energy technologies in the past half-century era of big oil.