A K Street Theory of Bankruptcy Reform

Reading stuff like this prompts me to showcase an idea I was noodling around with last year; nobody much paid attention then, so I am delighted to get another shot. Specifically: we talk about bankruptcy “reform” as the credit “industry” versus the poor, beleaguered debtor. But if Professor Warren is reading the data right, then the industry is no better off now than it was before 2005.

How can this be? Here’s a thought: maybe the true proponent of bankruptcy “reform” was never the credit industry per se, but rather the lobbying industry. Lobbying is a business that lives on hope and fear. No lobbyist makes any money by saying “no matter what we do, things will stay pretty much the same.” You make money by finding a problem and undertaking to solve it—or, if you can’t find one, then manufacture one, as in: you are being ripped off by Federal bankruptcy law. We can help.   

 This 900-pound gorilla was in the bedroom through all the years of the runup to BAPCPA: Creditors losing a gazillion in bankruptcy! Forget about any other problems with the data (how much is a gazillion, anyway?). Dawson Debtor owes Carlotta Creditor $1,000. Carlotta isn’t getting paid; Dawson goes bankrupt. Did the bankruptcy cause the loss? So far, there is no evidence that it did. We only know that Dawson isn’t paying; we have no reason to assume that he would have been able to pay had bankruptcy not intervened.   

 Granted, this is the point of the “means test”: the premise that there are debtors who do have “the means” to pay and would pay but for bankruptcy. There was a fair amount of contention over the question whether and to what extent there were such debtors. Early data seems to suggest that the current means test isn’t capturing many debtors. But it is not clear what inference to draw from this fact. It may be that debtors with “means” are just staying home—in which case, we would have to say that “the means test” accomplished its express purpose. It could be that creditors knew full well that the means test as drafted wouldn’t catch very many debtors, but that they wanted to get their snout into the trough to establish the principle leaving details for later. It could be that creditors just made “a mistake” and miscalculated how much it would yield.

Or it could be—and here is my point—that lobbyists sold their clients a blivik: got big fees for delivering, well, nothing at all. In a simple world, you might expect creditors to get shirty about this sort of betrayal and extract some kind of penalty later. Maybe, but that’s then and this is now: by the time the betrayal shows up, you’ll have a new set of lobbyists (or at least a new sign on the door) and, come to that, a new set of loan officers, who may not remember what the fuss was all about in the first place.   

 Meanwhile, it may be that the creditors (and their lobbyists?) have pushed us into a lose-lose situation where (a) creditors are working harder, spending money to (b) collect no more debt than they were collecting all along.

Postscript:  After drafting this, I ran across a fascinting post at Daniel Shaviro's blog, summarizing and quoting an otherwise-unavailable (to me) paper Edward Glaeser on "The political economy of warfare." From Shaviro, quoting Glaeser:

"This paper ... presents a model of warfare where leaders benefit from conflict even though the population as a whole loses. Warfare creates domestic political advantages, both for insecure incumbents like Napoleon III and flr long-shot challengers, like Islamic extremists in the Middle East, even though it is costly to the nation as a whole. Self-destructive wars can be seen as an agency cost problem where politicians hurt the nation but increase their probability of political success. This problem becomes more severe if the population can be falsely persuaded that another country is a threat."

Do with it what you will.