Fixing the household debt problem

The number of people the government has bailed out through consumer debt programs this year has reached to more than 600,000. President Park Geun-hye promised to ease the lives of the lower class by saving them from debt. The government offered various programs: The People Happiness Fund went to more than 180,000 people, various low-interest refinancing loans to 300,000 and the Credit Counseling and Recovery Service helped debt workout for 70,000 people. About 20,000 house-poor consumers also received financial aid to better service their mortgage loans.

The Park administration’s consumer debt bailout programs have been the most expansive in history. The government cannot be blamed for helping out people struggling under debt because debt write-offs are more cost-effective than the surge in credit delinquencies and bad debt.

However, the government’s moves are sending the wrong message to borrowers and the market. The unpaid rate on mortgage loans has been rising since the end of the election, and it hit 1.9 percent in September. Applicants for individual workouts - where debt can be written off when borrowers with income dutifully pay a certain amount for a certain period - could reach an all-time high this year.

There are ominous signs of moral hazard and a strong belief among the people that the government would bail them out if their debt is unpaid. If the beneficiaries get into another debt pit, there is no use in a bailout. We saw a bad example during last administration under President Lee Myung-bak. The government offered low-interest loans backed by the National Pension Fund. About half of the 6,600 people who received the loans could not even pay their interest on time. Debt only gets bigger if it’s not backed by affordable credit.

The government must make it clear that write-offs could only happen one time. Otherwise, consumers could expect a write-off when presidential elections come around every five years. More than 40,000 people are incapable for meeting their debt obligations every month. The people who faithfully repay their debt would otherwise feel angry.

The household debt problem should be solved through textbook theory: Boost people’s income and raise their ability to pay off debt. It’s more important to draw debtors back into a benign economic cycle than to merely write off their debt. For long-term senior and poor debtors with little or no stable income, the government should offer better welfare programs instead of debt write-offs.