What if the government bought up all bad debt?

Question:

What would be the possible outcome if the President were to initiate a program that would buy up all bad credit for those with credit scores below, say 670. All those who participate would agree to an auto draft of $20 per month or something until they reach 65 to pay back the debt owed the govt via creditors. Would this not help to stimulate the economy with individuals now having more credit power? Most people who get a second chance in the credit score will more than likely take care of it. You said ask right?

Answer:

This is a very intriguing proposal that deserves to be researched. It can have a stimulative effect for sure, at least in the short run. Once the government has paid off the bad debt, presumably banks will start lending again and that help stimulate growth. What is unclear is to what extend it may increase moral hazard in the sense that these same individuals may now be encouraged to borrow more knowing the government will come to their eventual rescue. Your plan may work better if these individuals are required to declare bankruptcy (and not be allowed to borrow any further). There is also the issue: what recourse will the government have if an individual defaults on the debt owed to the government.