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The Government's Lack of Intellectual Engagement Is Apparent in This New Plan

Last week, the federal government announced intentions to remove medical debt from credit reports, which are used to assess a borrower's financial suitability for major purchases like mortgages and car loans. This change aims to make it easier for individuals to incur additional debt without facing judgment for medical expenses.

From a factual standpoint, the Biden administration seeks to exclude medical debt from credit evaluations. It's worth noting that high medical costs are all too common in the U.S. For instance, I underwent heart surgery twice shortly after birth, which placed significant financial strain on my parents. The reality is that such expenses often necessitate loans, contributing to overall debt burdens that impact one's ability to secure other types of loans, such as mortgages or car loans.

Vice President Harris emphasized that medical debt poses challenges for millions seeking loans for homes, vehicles, or small businesses, hindering their financial stability and advancement. However, this perspective overlooks critical considerations and introduces risks into financial risk management.

This policy could exacerbate inflation in two significant ways. At an individual level, managing multiple loans complicates debt repayment and financial stability rather than providing an opportunity to improve one's position. Economically, enabling higher-risk individuals to access more debt will prompt lenders to raise fees and interest rates to offset potential defaults. Since medical debt will no longer impact creditworthiness assessments, all loan costs are expected to rise, exacerbating inflationary pressures.

Moreover, increased accessibility to debt for home purchases is anticipated to drive up housing prices. The government estimates this could result in 22,000 additional mortgages, injecting $9 billion of inflationary spending into the economy, including associated closing costs and economic activity. This comes amidst a period of prolonged high inflation, nearly double the Federal Reserve's target rate, compounded by other recent inflationary housing policies.

Already, shelter costs have escalated sharply, becoming a primary driver of inflation over the past year. Overlaying these factors shows a clear upward trend, reminiscent of pre-2019 levels when housing prices hit their post-financial crisis lows. Yet, recent months have also seen significant increases in medical care costs, suggesting that easing debt access amidst mounting medical debt will further amplify inflation risks, particularly for lenders.

Such inflationary housing policies present pervasive challenges in daily life, echoing the adage that "the road to hell is paved with good intentions." Federal Reserve Chair Jerome Powell's probable reaction underscores the unhelpful implications of these proposals in the current inflationary climate, where interest rate cuts are constrained by ongoing inflation concerns.

While this proposal remains subject to rule-making processes and potential legislative or judicial challenges, the administration's commitment underscores its intent to proceed with implementation, leveraging $7 billion from the American Rescue Plan to address medical expenses. Ironically, this initiative could inadvertently heighten costs for borrowers while attempting to alleviate financial burdens.

Amidst an environment of entrenched inflation, media and equity markets cautiously welcomed recent inflation reports, not as positive indicators but as tempered signals amidst ongoing economic cycles. As the administration positions this as a focal point in President Biden's pre-election agenda, its practical benefits versus risks remain contentious, possibly indicating a lapse in comprehensive policy foresight.

In conclusion, whether politically motivated or well-intentioned, this initiative potentially reflects a concerning absence of strategic foresight within government policy-making.

In our previous post: "What does a guarantor mean?''

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