Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

A Modest Proposal: The Free Market Solution to the US Household Debt Problem–Debtors' Prisons

By Jane Burns
September 17, 2006
http://www.itulip.com/forums/showthread.php?t=434

As the real estate bubble deflates and credit card interest inflates, it's time to consider a dynamic new engine for America's service economy—debtors' prisons, the next logical step in a free-market economy in which easy credit has freed more us from the burden of saving and allowed us to experience “the good life.” But unfortunately many of us have failed to take responsibility for our financial choices. We borrowed too much and then declared bankruptcy, blithely erasing our obligations and leaving our lenders holding the bag.

Concerned for the perilous position of lenders and their shareholders after hundreds of billions of dollars were lent to millions of households with limited savings and assets, Congress passed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Under the act, many debtors who cringe every time the phone rings will no longer be able to get a “fresh start” with a Chapter 7 bankruptcy. If these debtors make more than their state's median income, they will have to declare a Chapter 13 bankruptcy, which requires them to repay debts as they continue to earn.

Some of the bankrupt will do the right thing under Chapter 13 and pay what they owe, perhaps for the rest of their lives. But others, predictably, will not. They will shirk their debts simply by ceasing to earn. “You can't get blood from a stone,” they will mutter to themselves.

Consider, for instance, the many American homeowners now struggling to make rising monthly payments on their adjustable rate mortgages, or those who took out second mortgages in the expectation of continually rising home values. If they have a financial setback and can't make their payments, they may lose their homes. And if, because of falling real estate prices, what they owe exceeds the value of their homes, their problems are compounded because they have a so-called underwater mortgage.

Before bankruptcy reform, consumers could cure underwater mortgage debt in a Chapter 7 bankruptcy. But that's not so easy anymore, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Many will have to keep paying off underwater mortgages on homes in which they no longer live. Meanwhile they will need to be taken in by friends or family, or rent shelter.

Not unreasonably, many landlords will not rent to those who have recently gone through foreclosure or bankruptcy. Finding an affordable rental unit may be even more difficult in metropolitan areas where the recent widespread conversion of apartments to condominiums has great reduced the available stock of rental housing. And since many debtors unable to obtain rental housing will also have lost the cozy vehicles in which they might otherwise have lived, and lack friends or family to take them in, a considerable number will become homeless.

Some homeless debtors with strong work ethics will persevere in earning a legal living and servicing their debt. But others will engage in “underground” cash-only economic activities such as begging and thus avoid attachment of their wages. The availability of homeless shelters, where debtors may come and go as they please, plus the provision of free nourishment in many municipal parks, will encourage this irresponsible behavior.

But why should homeless debtors loaf in shelters and parks when they can be working off their debt in prison, contributing to the economy, while also creating thousands of badly needed jobs? The weepy-wipers who warn of “social chaos” as the noose of falling real estate prices and bankruptcy reform tightens in America fail to understand that free markets thrive on “creative destruction,” a concept introduced by economist Joseph Schumpeter in 1942. The free market always has the answer. In short, from the ashes of ten million ruined American households, a thousand debtors' prisons can arise to carry the economy forward inexorably to its next stage of rapid expansion.

Debtors' prisons have a strong historical track record. Although Charles Dickens railed against such prisons because his father was often in one, they helped propel England's Industrial Revolution. People frightened of them worked hard and paid their debts. It's no coincidence that England lost its world dominance not long after abolishing them in 1869.

Today in America, debtors' prisons can be the spark plugs our economic engine needs to keep our economic engine cranking full speed. Just picture it—in blighted areas nationwide where Wal-Marts have killed off local small businesses and manufacturing has died, shareholder-owned private prison and hospitality companies can construct hundreds of debtors' detention centers. New motels and restaurants will spring up to accommodate visitors.

And inside these prisons, “fresh start” programs will be available for those willing to work. Web-savvy debtor-prisoners will be employed to develop web sites that offer new credit products for those still on the outside, others in call centers where gruff-voiced debtors can place demand calls to those in arrears, while those who know how to work with their hands can stamp out millions of fresh credit cards, while yet others can stuff envelopes to help fulfill the more than six billion credit card solicitations that need to be sent to US households every year. And those who wish to labor outdoors can remove litter from our roadways. You'll seem them wearing orange jumpsuits with a huge “D” on the back.

Clearly, debtors' prisons will be a jobs powerhouse—tens of thousands of stable jobs will be created annually in sectors including construction, food service and security. These new jobs will help replace those lost in manufacturing as well as those likely to start diminishing in real estate-related activities, which has been responsible for over 40 percent of new jobs in recent years. “The business of America is business,” said Calvin Coolidge, U.S. President from 1923 to 1929. The business of tomorrow is indentured servitude.