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The Case for Bankruptcy
Near the end of a long somewhat equivocal post on the pending bankruptcy bill, Jane Galt makes an important point: "easy bankruptcy is one of the great unrecognized strengths of the American economic system. Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever." Quite so. She should also consider taking on the point that insofar as the current system really is prone to abuse, the bill in question largely fails to halt that abuse since Republicans would never do anything to make life harder for rich people. I was a little wishy-washy on this topic as of a couple of months ago, but when you think about it the whole idea is really moronic. Credit card companies are making plenty of money as is. And more to the point, credit card companies can always just choose not to lend so much money to so many people if they think not enough of their loans are getting paid back. It's their money, after all, nobody's forcing them to send all these credit card solicitations out to everyone all the time.
March 8, 2005 | Permalink
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» Bankruptcy from bennellibrothers.com
Matthew Yglesias and Jane Galt discuss the bankruptcy issue. NPR also had an interesting story this morning on the history of Shumer's bill and how it related to attacks on abortion doctors. Once the "attackers" would be caught and taken... [Read More]
Tracked on Mar 8, 2005 9:15:02 AM
» Bankruptcy and Trust from CommonSenseDesk
This bankruptcy bill is an affront to any fair minded citizen. [Read More]
Tracked on Mar 8, 2005 12:06:30 PM
» Crush the Pricks from Jim Snowden's Omnibus
Speaking as a potential victim of Bush's bankruptcy bill, I would say that this is not only a moronic idea and a sop to banks who want to gain their freedom to take huge risks by spoiling everyone else's; but it is, like Social Security, a moral issu... [Read More]
Tracked on Mar 8, 2005 2:59:52 PM
» Wishy Washy from Fact-esque, A Reality-Based Blog
This post about the Barriers to Bankruptcy Bill at Danny's blog explains exactly why I can't take him seriously: I was a little wishy-washy on this topic as of a couple of months ago, ... I know that litmus test [Read More]
Tracked on Mar 8, 2005 4:42:00 PM
Comments
The credit card companies build the default risk into the pricing. I should know, I once worked as a credit analyst for a mortgage lending company. It's really a short term money grab since they'll force all the existing cardholders that will someday file for bankruptcy to pay it all back even though the risk is built into the rates they're paying. The other advantage is if we have an across the board depression, and the built-in credit risk on loans turns out to be insufficient.
Posted by: BANG! | Mar 8, 2005 1:10:11 AM
Maybe eliminating the bankruptcy option will lower the rates across the board for everyone, including shlubs like me with average credit. On the other hand, once it's implemented, everyone will get lots more credit than they deserve. How would the economy look if half the country is locked up in debt. Isn't this the one provision keeping creditors in check?
Posted by: BANG! | Mar 8, 2005 1:22:56 AM
People with bad credit actually wind up subsidizing the people with good credit, or those who pay their bills off in full every month. I make my lender lose money, since paying off the bill every month is like getting the purchases lended to you interest free. Without the ability to loan-shark it over the working poor, yes, interest rates would probably have to rise. (Though what do you bet that if this bill passes, the rates still won't come down.) That doesn't make the lending practices right, especially when they profit so much on the backs of the poor, and it especially does not mean that the best method of restarting their lives should be foreclosed. (The real beneficiaries may be those debt counselling services, which are a whole problem in themselves. Who would have thought bankruptcy could get privatized?)
Further, Matt is dead right rearding the rich and their loopholes and the fact that if the credit card companies were really getting burned, they know exactly how to stop it. I wouldn't mind less junk mail, for one. (The junk mail could at least be for the Amex Black Card, and make it worth my while.) Krugman hits this issue out of the park today, by the way.
Posted by: db | Mar 8, 2005 1:43:36 AM
The amusing thing about the current conservative private-debt-is-bad theory is that it contradicts their public-debt-is-not-so-important theory. If public debt is not so bad, then one can simply have the government pay off private debts and incur public debt as a result, and since public debt is not so bad, there won't be any economic ramifications from it. So under this plan of having the government paying off our private debts, we get our free lunch according to contemporary conservative economic theory.
Posted by: Dan the Man | Mar 8, 2005 2:03:23 AM
...when you think about it the whole idea is really moronic.
Oh, please. The idea is good for one group and bad for another group, like almost every other political idea.
Class struggle, remember?
How do they manage to brainwash you, fellas, to think that these things may be 'smart' or 'moronic' in abstract? And then you become journalists and bullshit the rest of us... This is quite appalling, really.
Posted by: abb1 | Mar 8, 2005 3:23:08 AM
"She should also consider taking on the point that insofar as the current system really is prone to abuse, the bill in question largely fails to halt that abuse since Republicans would never do anything to make life harder for rich people."
While I'm sure you really believe that, and you might just coincidentally be right in this instance, wouldn't it be smarter to establish that the bill in question "fails to halt abuse" by looking at the bill itself, rather than your personal predjudicies concerning the authors? I've never found the ad hominem all that persuasive.
Posted by: Brett Bellmore | Mar 8, 2005 6:08:42 AM
Credit card companies are making plenty of money as is. And more to the point, credit card companies can always just choose not to lend so much money to so many people if they think not enough of their loans are getting paid back. It's their money, after all, nobody's forcing them to send all these credit card solicitations out to everyone all the time.
What Matt said.
Posted by: P. B. Almeida | Mar 8, 2005 7:32:53 AM
Bankruptcy attempts to strike a balance between people being afraid to go into debt, even in order to undertake very worthwhile investments, and lenders being afraid to extend credit because they won't be repaid. While it's quite correct to say that we should have little sympathy for creditors because they didn't have to loan the money in the first place, it's always true (competitive businesses are, in principle, morally neutral intermediaries) and a bit beside the main point. One _could_ imagine a world in which harder bankruptcy would be a good idea because denial of credit was preventing people from financing very reasonable economic activities like buying houses or educating themselves, but the actual world doesn't seem at all like this. In the absence of any evidence that this bill might result in the beneficial extension of credit, or that honest people are paying outrageous rates, or that it is just a matter of allowing the law to take advantage of easy and highly accurate ways of distinguishing between abusers and the deserving, there seems to be no valid economic argument for this bill.
The Zywicki posts recommended by Jane Galt seem sincere, but they don't make this sort of argument, instead appealing to moral outrage over somebody somewhere getting away with something.
Posted by: Andy McLennan | Mar 8, 2005 7:33:07 AM
"She should also consider taking on the point that insofar as the current system really is prone to abuse, the bill in question largely fails to halt that abuse since Republicans would never do anything to make life harder for rich people."
An ironclad proof. This is the mighty power of ratiocination for which Mr. Yglesias is famous?
Posted by: sammler | Mar 8, 2005 8:05:54 AM
RE: Republicans would never do anything to make life harder for rich people
I haven't been able to follow the bankruptcy bill this time; all the previous incarnations, though, explicitly limited the changes to those making over median income (e.g. "the rich")--does anyone know if this limit on the effect was taken out?
Posted by: SamChevre | Mar 8, 2005 8:07:44 AM
I'm going to bring in an issue from right field here -- does the "takings" issue relate to this at all? If I borrowed money under the current bankruptcy laws, and then the government passes a law changing the rules on me, shouldn't the people who think environmental or zoning laws represent an illegitimate "taking" of my property come to my defense? O.K., I won't hold my breath. But the principle is related: people have been paying usurous interest rates on the grounds that they could take advantage of bankruptcy -- and now that possibility is being pulled away.
Posted by: barry | Mar 8, 2005 8:10:48 AM
On the positive side:
In pushing things like the Bankruptcy Bill and the Social Security privatization, the GOP is defending the interests of the nation's asset holders in a way that will cause direct and attributable pain to most voters.
This is very different than mere tax cuts for the wealthiest, in which the pain to most voters is diffuse and unattributable.
In other words, the Republicans are setting themselves up for a serious realignment. Now if we can just nominate someone like John Edwards next election who highlights the struggle between wealth and work in both message and biography, we can get that realignment started.
Posted by: Petey | Mar 8, 2005 8:15:03 AM
Ship the debtors to Guantanamo!
If MBNA doesn't achieve the largest market cap of any corporation, the terrorists win!
Posted by: Petey | Mar 8, 2005 8:18:31 AM
I'm an agnostic on the proposed bankruptcy reform, because I haven't spent any real time or effort to review what has been proposed. That said, this was a juvenile post by Mr. MY: credit card companies are making lots of money, and they can extend credit to fewer people, so we don't need bankruptcy reform.
I guess he hasn't studied the issue either.
Posted by: ostap | Mar 8, 2005 8:19:09 AM
Brett and Sammler,
re: "Republicans would never do anything to make life harder for rich people."
It should be a fairly simple matter for you to disprove Matt's assertion -- just name one significant policy proposal that Republicans crafted and enacted that makes life demonstrably harder for rich people.
Posted by: MarkT | Mar 8, 2005 8:40:24 AM
On the subject of "security breeds entrepeneurs" (perhaps not the primary topic of this thread), my wife and I have diabetes. When I was between jobs I needed to find a position with health benefits. Starting my own business wasn't really an option. Single payer systems, whether health care or retirement, allow more risk taking. The "ownership society" seems designed to make us all docile employees.
Posted by: DonV | Mar 8, 2005 8:49:10 AM
This is not really about credit cards. Very few people get into trouble abusing credit cards, and the current system is quite good at taking care of them.
Bankruptcy is caused by three factors: medical expenses, divorce, and job loss. As to the first, twenty years ago, people didn't pay their doctors with credit cards. Now they do. The risks of the medical system have been shifted to credit cards.
As to the other two, married people with two jobs rarely get in so much trouble that they cannot pay their credit cards. But if they get divorced, or one of them loses their job, they cannot. The risks of job market volatility and easy divorce are shifted to the credit card companies.
That said, the bill does not help the credit card industry. It was hijacked by the automobile finance industry, and more money will be going to secured lenders at the expense of the unsecured credit card lenders.
Posted by: masaccio | Mar 8, 2005 8:52:50 AM
What both Jane and you are both doing is confusing bankruptcy and incorporation. The existence of the ability to incorporate is what allows individuals to take investment risk without running the risk of being ruined forever by it not working. This has little or nothing to do with the bankruptcy laws now being passed. We are now talking about "personal" bankruptcy and that has little or nothing to do with the creation of new businesses.
Posted by: spencer | Mar 8, 2005 9:01:21 AM
re: "Republicans would never do anything to make life harder for rich people."
It should be a fairly simple matter for you to disprove Matt's assertion -- just name one significant policy proposal that Republicans crafted and enacted that makes life demonstrably harder for rich people.
The AMT was passed during the Nixon administration.
Posted by: mw | Mar 8, 2005 9:10:09 AM
"What both Jane and you are both doing is confusing bankruptcy and incorporation. The existence of the ability to incorporate is what allows individuals to take investment risk without running the risk of being ruined forever by it not working. This has little or nothing to do with the bankruptcy laws now being passed. We are now talking about "personal" bankruptcy and that has little or nothing to do with the creation of new businesses."
Er, no. Corporations have, you know, investors, and when they start up they generally don't have a broad base of them. Incorporating doesn't shield you from going broke if you have all your money invested in one...
Posted by: Scott Lemieux | Mar 8, 2005 9:11:29 AM
The existence of the ability to incorporate is what allows individuals to take investment risk without running the risk of being ruined forever by it not working. This has little or nothing to do with the bankruptcy laws now being passed. We are now talking about "personal" bankruptcy and that has little or nothing to do with the creation of new businesses.
This is completely wrong. Most entrepreneurs are people. People have to get money from somehere in order to form firms of any sort. Borrowing is a primary means of getting this money, and that usually means, at least to start, signing a note with one's own name (or, as is often the case in contemporary society, getting as much plastic as possible and using this form of credit to fund the start-up).
Reforming the bakruptcy code in favor of lenders would almost certainly exert a detrimental effect on business formation and entrepreneurial activity.
Posted by: P. B. Almeida | Mar 8, 2005 9:22:52 AM
This is not really about credit cards. Very few people get into trouble abusing credit cards, and the current system is quite good at taking care of them.
Bankruptcy is caused by three factors: medical expenses, divorce, and job loss. As to the first, twenty years ago, people didn't pay their doctors with credit cards. Now they do. The risks of the medical system have been shifted to credit cards.
BS. First of all the 'half of bankruptcies caused by medical expenses' meme is bogus. Second, certainly not all people who go through divorce or experience job losses become bankrupt--nor all people of modest means who experience divorce or job loss. Which among the newly divorced or unemployed are the most likely to declare bankrupcy? How about the ones who lived with large credit balances, mortgages, and car loans BEFORE their misfortunes hit--that is, the ones who left themselves no margin for error?
People--ESPECIALLY responsible people of modest means--know that financial irresponsibility plays a role in bankruptcies. Insead of telling us how many people had at least two weeks of missed employment or $1000 in medical expenses in years leading up to bankruptcy, how about a study telling us how many had upside down loans on vehicles, mortgages taken out up to the limit of their incomes, and/or maxed out credit card bills that contained at least $1000 in spending on, say, restaurant meals, consumer electronics, or airplane tickets? How many had cable TV and/or cell phone bills of at least $60 a month? You get the idea.
Liberals can, and should, oppose this bill without pretending that bankruptcies are visited on virtuous people only by circumstances of fate beyond their control, because everybody KNOWS that's BS.
Posted by: mw | Mar 8, 2005 9:29:02 AM
Petey is starting down the right path. This bill helps New York financial institutions at the expense of red state, middle class workers. This is where an effective spokesperson on a right wing media outlet could make for a big swing in public opinion. Pelosi had her shot on FOX on Sunday.
I second the notion that this bill is anti-entrepreneurial as are the Social Security proposals of Bush. Removing the net under a trapeze act cuts way down on the riskiness of the performance.
Posted by: ted | Mar 8, 2005 9:30:20 AM
mw, it's pretty clear that comments about the Republican party pertain to recent history--say, post-2000. The Nixon Administration also introduced price controls and appeared receptive to a federally-guaranteed income for all Americans, but there's not a soul on either side of the aisle who believes these policies are characteristic of the party's current philosophy.
Even George H.W. Bush raised taxes on the wealthiest Americans.
Posted by: Brittain33 | Mar 8, 2005 9:32:49 AM
This is also why we should have single payer health care - how many brilliant entrepreneurs with great ideas are afraid to leave their jobs and strike out on their own because they need the health care coverage their employer provides?
Posted by: Ted | Mar 8, 2005 9:34:08 AM
