It's All About Risk II – Bankruptcy “Reform”
There was an interesting editorial in the Washington Post today by E.J. Dionne dealing with this week's attempt to pass a bankruptcy “reform” bill:
There
is a great misunderstanding that the key fight in our politics is
between friends and foes of capitalism. In fact, the battle is among
supporters of capitalism who disagree over what rules should govern the
market. Should the rules favor the wealthy and the connected, or should
they give some protection to those who fall into distress and would
like nothing more than a chance to rejoin the ownership society? If
Democrats sell out on the bankruptcy bill, they will, alas, show which
side they're on.
(There is also a New York Times story about this week's Senate debate here.)
Following
on to the (seemingly endless) posts about Social Security, this debate
again focuses on who should bear economic risk in our society –
individuals or a larger entity?
Our
society seems completely awash in cheap credit. No matter your
income level, your past history or ability to repay debt, there is
always someone there willing to sign you up for a credit card.
Extending unsecured credit is fine and dandy, but there is risk in this
business arrangement. What happens if the debtor cannot repay?
In past
years, banks and lending agencies had to be somewhat careful with how
they extended credit – if the debtor could not repay, it often meant
the bank could not regain the losses they took from the loan.
(This happened in the 1980s with farm credit loans, and later on in the
“Savings and Loan” scandals and bankruptcies.)
With
unsecured credit, there is no 'foreclosure' – which means that the
lender is taking a fairly large risk that the lender is fully aware
of. With this attempt at 'reform', these lenders that make profit
on high interest risky unsecured loans are asking the government to
take away that risk and place it firmly on the shoulders of the
borrower.
(One
might ask in these cases why we as consumers don't pressure lenders to
make 'good' unsecured loans – thus shorting the whole argument about
costs being passed on.)
In
addition, we have to consider the effect on a family (or individual)
with good credit that has something horrible happen to them – in a
large percentage of cases, a health problem that drains the family
finances. Instead of being able to declare bankruptcy – with some
risk being shared by a creditor – that individual or family will be
shouldered for the rest of their life with debt they may never be able
to repay.
Again –
this debate is all about economic risk. Should a creditor bear
some of the risk of making a loan, or should the individual bear all of
the risk?
In addition, the Los Angeles Times did a series on economic risk that is freely available (without registration) here.
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