Bullshit--Professionally Speaking

I don't get to post very often right now, but sometimes I can put on my academic robes and talk about a new piece of scholarship. And what better thing to talk about when wearing academic robes than bullshit?

Curtis Bridgeman and Karen Sandrik have written a new piece called Bullshit Promises. The piece focuses on contract language that is designed to make someone believe that something has been promised (e.g., a promise of a fixed interest rate highlighted in the contract) while buried somewhere else is another provision that takes away that right (e.g., reservation to change terms at any time).  The result is a "bullshit promise," something that will mislead--all within the bounds of current contract and tort law.  

How Congress Could Save GM

Ronald Trost is surely one of the sharpest minds in Chapter 11.  He negotiated the Chrysler non-bankruptcy bankruptcy back in 1979. (His work is highlighted in Moritz & Seaman, Going for Broke:  The Chrysler Story.  Jay Westbrook and I still use an excerpt from that book to introduce Chapter 11 negotiations to law students in our casebook.)  Ron is now Of Counsel with Vinson & Elkins, and he's still one of the most creative people in the field. In fact, he's laid out a plan for reorganizing GM.   

The plan is ingenious. Believing that there's not enough time left to negotiate a consensual Chapter 11 for GM, Ron has an alternative. He takes the best elements of Chapter 11, then short circuits much of the negotiation process to reflect the current economic realities. He shows how Congress could pass a law to resolve many of the most intractable problems, offer government guaranteed financing, and effectively impose a rapid settlement on all the parties.  It is a tough-love solution that imposes some pain on everyone, which is exactly what we should expect from a tough-love kind of guy like Ron. 

What Happened to Truth-in-Lending?

Professor Lynn LoPucki sent this email, which I pass along with his permission. Perhaps someone will want to answer his question.

Last  month I was a little short of cash, so I left $3,000 on my credit card balance. The bill I got today shows a finance charge of $122. Citibank states that the APR is 14.49%, but by my calculation, the rate charged is 48.8%.

Layaway Christmas

K-Mart has a new ad: Pick out your Christmas presents today, pay a little now and a little as you go along, then pick up your paid-for presents in time for holiday giving. If we needed evidence of the constriction of consumer credit, here it is. K-Mart is advertising the layaway plan that department stores used for decades before the free flow of credit turned the layaway plan into a relic.

Who Needs Bankruptcy Reform?

When Eric Nguyen, a 3L at Harvard Law School, conducted his research on the disproportionate efforts of families with children to save their homes through bankruptcy, he seemed to be embarking early on a promising scholarly career. But events have made his research intensely relevant to national debates. In an op-ed in today's New York Times he reprises his central findings.  Eric endorses an amendment to the bankruptcy laws that would permit a bankruptcy judge to restructure home mortgages. 

Senator Dodd and Congressman Miller advanced this proposal early last spring, but the lobbyists from the American Mortgage Association fought them off.  Even as the bailout took shape, the banking lobbyists were still calling the shots to block bankruptcy amendments. Not surprisingly, mortgage holders prefer a government bailout over taking the write downs on their bad mortgages.  The McCain proposal offers just that: a payoff on bad mortgages at their full face value. The taxpayers--rather than the investors--would take all the losses. 

Eric's op-ed is timely--but time is running out.

Colonel Ken

Colonel Ken Allard is no whiner.  He's military tough, a firm believer in personal responsibility.  But he has been so badly treated by Bank of America that he decided to go public, here and here.  Along the way, he picked up stories from other folks about their treatment at the hands of B of A.

I like the colonel.  He has the sort of "I'll fix it myself" view of injustice that makes me root for him. But I read his story and I wonder:  how many people will be cheated, scammed, tricked, ignored and generally infuriated before someone says it is time to put some basic supervision in place.

Is the Crisis Real?

At a Harvard panel discussion yesterday, [correction**] Gregory Mankiw--Harvard economist and Chair of the President's Council of Economic Advisers 2003-2005, made an interesting point: The liquidity crisis isn't real.  Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Greg said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines."  Why?  Because the financial services industry does not want to pay the terms required to get that money back in circulation (e.g., give up equity).  As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash? 

Economics professor Ken Rogoff also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can't support it.   

Greg's work with the current administration and Ken's background with the IMF and on the Board of the Federal Reserve add a certain credibility to their assessments of conditions on Wall Street.  If they are right, the $700 bailout is saving some investment bankers' jobs in the short term, but overall it is just making the financial system worse. 

A Ray of Sunshine

I know things are moving fast and furious on the bailout, but the House did a significant bit of business today that deserves note.  By a vote of 312 to 112, Congresswoman Maloney's credit card bill has passed the House of Representatives.  The credit card issuers had said No Way No How on this bill for a year, and lobbyists had pounded on every member of the House.  Hours ago, a bi-partisan group said the new rules should become law. 

The bill won't become law this year--no time to get it through the Senate and little chance that the White House would sign off--but it is a significant event nonetheless.  For a moment today the lobbyists weren't in control. 

So take a deep breath and savor the moment. The consumer groups, ably led by the Consumer Federation of America, showed strong support and engaged in some clever maneuvers of their own.  I'm still deeply worried about the American family and about the economy. The $700 billion bailout on the table is keeping me awake at night, but this little ray of sunshine tells me it isn't time to give up hope quite yet. 

As Treasury Sows, So Shall It Reap

Once the Treasury bailed out Bear Stearns with government guarantees, the next buyer of a major US financial institution might expect similar help. Barclay's was the last likely buyer of Lehman Brothers.  Minutes ago, it announced that without the US taxpayers putting their money on the line, Barclay's isn't interested in buying. 

We can debate whether the government should have bailed out Bear Stearns, but surely the current mess tells us one thing we should not have done:  Bail out Bear Stearns and then return to business-as-usual.  So long as the only tool the government seems to have to halt this crisis is a bailout, then we are in trouble.  More bailouts will be needed, and, at some point, even the American taxpayer can't handle it. 

Lose Your Home, Lose Your Vote

With both political parties are focused on Michigan this fall, high foreclosure rates and the neighborhood fallout from those foreclosures are likely to become a political issue.  The GOP has announced a new way to deal with the problem: challenge the voting eligibility of people whose homes have been posted for foreclosure.  Evidently the GOP thinks those people are more likely to vote Democratic, so it can neutralize the impact of a sour housing market by barring votes from those who are losing their homes.

It isn't clear from the report whether the challenge is based on posted foreclosures or homes that have already been transferred from the homeowner. Presumably the challenge is based on no longer living in the area.  Depending on how the list is constructed, this means challenging some larger or smaller number of people who are in financial trouble, but who are in their homes and are certainly eligible to vote in their local precincts.

Connect the Dots

As I was reading last night, I came across three separate little dots of information.  The first dot was good news for AmEx, the credit card of choice for higher-income, less financially stressed families, from JD Powers rating company:

American Express ranks highest among all credit card companies and performs well across all of the five customer satisfaction factors. Amex’s customers are generally what the industry calls “transactors” – customers who pay off their bills in full every month and the company focuses on the rewards and benefits of its cardholder experience and it excels in meeting their expectations. Nearly 8 out of ten transactors select their card because of the value they feel they get from its rewards programs, with interest rates of little importance because of their purchasing style.

The second dot was bad news for AmEx:

Revisiting the 2005 Amendments When Times Get Hard

As a follow up to my earlier post about the forces that have made bankruptcy less workable for reorganizations, I note a new Businessweek article.  Retailers are feeling the pain of reduced consumer spending and tough credit terms, and now they are discovering that the 2005 bankruptcy amendments will make it harder--or impossible--for some of them to reorganize.

In an article entitled, When Chapter 11 is the End of the Story, reporters have started interviewing failing retailers who are facing new hurdles because of the changes in the law. The conclusion?  Companies that might have reorganized before 2005 may now be pushed into liquidation.

Systemic Risk, Business Risk and Bankruptcy

Yale economist Robert Shiller argues that we need to add a new structure to the bankruptcy code, one designed to deal with systemic risk.  He notes that the failure of a giant hedge fund or of multiple businesses could bring down the whole economy, and that we need to put in place the tools to deal with such a crisis now--before the next crisis is upon us.

I think Dr. Shiller is right about 1) the need for a mechanism to deal with systemic failure, and 2) that bankruptcy is the right place to develop such a scheme.  I also fear that most policymakers won't see the need until it is too late.

But things are worse that Professor Shiller suggests. 

The Path to Economic Growth: Bankruptcy

For years, lenders and the IMF have told developing countries that if they really want economic growth they need to adopt strong creditor-protection laws.  Without that, no one will lend--or so they said.  A new empirical paper takes another cut at that advice.  According to a country-by-country analysis of merger and acquisition behavior, Creditors' Rights and Corporate Risk-Taking, strong bankruptcy laws may do more to promote beneficial risk-taking and economic growth. 

The insight of the paper is interesting:  strong creditor rights make corporations risk averse. As a result, these laws "induce costly risk avoidance," causing the companies to engage in practices that fail to maximize the value of the firm and it's potential.  The study finds the effects are particularly strong in countries where management is ousted whenever the business fails. 

Debt-Free: An Unrealistic Expectation

A Vice-President at Dickinson College complained about the move by wealthier schools to eliminate student loans as part of the aid package, arguing that such a move creates the "unrealistic expectation that students should graduate debt-free."  He points out that people borrow for cars and homes, and that education is just like any other big-ticket purchase.  In effect, rich people can buy it for cash and those with less money should finance it over time. 

If education is like a Hummer--cash or credit--then why stop with college?  Why not shut down the public schools K-12, and let those whose parents want them to learn to read and write pay cash or take on loans? (Maybe we're heading that way with failing schools in some cities.) 

Credit Card Promises

During the debates over bankruptcy reform, the credit industry launched a public relations campaign claiming that bankruptcy cost every American family $400 every year. The stat was picked up and repeated as fact by both the politicians and the press (more details here). The promise was clear:  pass bankruptcy reform and watch the costs of consumer credit fall. Now the numbers are coming in. Did credit industry losses decline? Did the cost of a credit card go down? A new paper, The Effect of Bankruptcy Reform on Credit Card Prices and Industry Profits, assembles pre- and post-BAPCPA data to answer that question.

First, the answers from the author, Mike Simkovic: 

Credit Cards and the Mortgage Meltdown

The role of subprime lenders in inflating the housing bubble, then bringing down the whole economy has received plenty of headlines.  But there has been little attention paid to the role of credit card lending and BAPCPA in the current home foreclosure crisis. 

A new academic paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address.  Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.

Obama: Amend Bankruptcy Laws

As I write, Senator Obama is giving a major policy speech on bankruptcy.  So far as I know, he is the candidate to discuss consumer bankruptcy in a general election.  I can think of many reasons that bankruptcy is a terrible subject for someone running for president.  It is very technical (hard to wedge into a sound bite). It is depressing (no one wants to think about going bankrupt). It will annoy big-money interests (financial services gave big money to pass the current bankruptcy laws). 

Savvy handlers would advise against it.  So why would a presidential candidate make bankruptcy relief a visible part of his platform? 

Credit Check

Late yesterday I recorded an interview with Terry Gross on Fresh Air.  She is one of my favorite interviewers (smart, and what a voice!).  She had called me to ask about credit reporting agencies. What made the interview stand out was her introduction. She told a story about her husband's trip through Credit Reporting Hell. 

When Kids Lose Their Homes

The ABLJ just published a new paper, Parents in Financial Crisis: Fighting to Save the Family Home.  The paper uses data from the 2001 Consumer Bankruptcy Project to examine the differences in how hard people struggle to save a home based on the presence--or absence--of minor children in the house. The data support the claim that families with children work harder to try to hang on to home both before and during bankruptcy.  The finding is consistent with the thesis that families buy homes as a way to buy opportunities for their children (schools, neighborhoods) and that the potential loss of a home is more painful to parents who fear the lifetime impact of the loss on their children.

The data pre-date the current mortgage crisis, but they are useful on several levels for thinking about what is happening now. At one level, the data reported in Parents in Financial Crisis are a reminder of the impact of a wave of foreclosures.  For adults to pick up stakes and move to a rental in a less desirable part of town can be painful, but they can go to the same work every day and continue the same after-work activities.  For a child, however, foreclosure may mean transferring to a weaker school, losing a chance to play in the band or on a softball team, dropping out of a scout troop, and losing all the friends she has ever known.  Sure, we're a highly mobile society, and children move all the time.  But a move to a nicer house or a move so mom can take a better job is a move that most parents undertake at least in part with an eye toward improving a child's lifetime chances. A move from a foreclosure is not a move up.

Citibank Says Credit Market Doesn't Work

Citibank announced yesterday that it might take back its highly-publicized promise to abandon universal default. The promise drew praise when it was announced, and it also helped Citibank and other lenders fight off any new regulations. After all, if the industry would regulate itself, Congress wasn't needed. This was just another example of the genius of the free market--better products will prevail, increasing consumer wealth. But it seems the market didn't work so well.

Have You Already Lost?

The reasons to dispute a credit charge are many--mistakes, failure to credit a return, identity theft, a lost payment that triggered penalty interest and fees, etc. Maybe the company will be nice and settle, or maybe the charge will be small an the customer will grumble and pay.  But if you had a serious dispute you wanted to pursue, have you already lost? 

Business Week has a cover story this week about credit card disputes are settled through arbitration.  The focus is on NAF, an arbitration outfit that, by its own accounting, arbitrated 18,075 cases between a business entity and a California consumer. The score?  Business won 18,045, and consumers won 30.   

From Redlining to Target Practice

Redlining was a practice that banks once used:  hang a map on the wall, draw a red line around minority neighborhoods, and deny all mortgage loans inside the line.  The results were devastating--depressed prices because no one could get financing to buy homes and underinvestment in African American and Hispanic communities.

But those bad old days are gone.  Now some lenders seem to draw a line around minority neighborhoods, then paint a big bulls-eye on them.  That's where they target their worst mortgages.  Massachusetts Attorney General Martha Coakley filed suit yesterday against Option One, the mortgage arm of H&R Block, alleging that they piled on costs for non-white families.

Why Is This Legal?

Are there some deals that are so bad that they shouldn't occur?  Or it is enough to say that people have choices, and if they make bad choices, tough?

I had lunch with a bankruptcy lawyer, who followed up with an email story:

The Credit Card Lesson

The effective repeal of usury laws in the US was accomplished in the quietest possible way:  In 1978, the Supreme Court interpreted an century-old banking law to determine that federally-chartered banks to lend to people in other states so long as they complied with their home state's usury rate.  It wasn't long until the Chairman of Citibank paid a call on the governor of South Dakota, who rammed through a new, high ceiling on interest rates.  Now Citibank was free to charge whatever it wanted--and states lost the right to protect their own citizens.

The usury story is old and famliar to commercial law types, but it is taking on a new importance.  It seems that John McCain wants to borrow the idea for use with insurance regulation.  According to a terrific piece by Robert Gordon in Slate, Senator McCain thinks federal law should be changed so that insurance companies in one state (say, South Dakota) could sell their products in all the other states, even if those insurance products don't meet the local standards for care.  In other words, just as exporting interest rates became a way to deregulate credit cards, exporting health insurance licensing can be a way to deregulate health insurance.

Banks: State Laws Not for Us

Just when you think the mortgage mess can't get any worse, the banks come up with a new idea: They shouldn't have to obey state law when they foreclose on someone's home. 

Pre-emption has been a gravy train for the national banks, insulating their credit card business from state laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn't have to follow local foreclosure laws when they take people's homes.

Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws, just like they always have. Amazingly, this is expected to be a close vote. 

The Stimulus that Can't Stimulate

Hanging the worldwide economic recovery on reigniting consumer spending is like investing in used fireworks.  The pizzazz is already gone. 

How are Americans planning to spend their stimulus checks?  According to a new poll, fully 41% say they will use their rebates to pay down debts.  Another 19% are trying to protect themselves by saving it, so that 60% have no spending plans at all.  Only 7% describe new spending.  Debt is blocking a large part of any impact the stimulus package might have had.

The Bear is Dead

The Fed's extraordinary step in propping up Bear Stearns, followed by Morgan Stanley's JP Morgan's purchase of the company at a fire-sale price, has everyone reeling.  But for Credit Slipsters there's an odd little irony worth noting:  Why didn't the Bear file for Chapter 11? 

In the be-careful-what-you-wish-for category, the Wall Street Journal noted:  "Bankruptcy experts said filing for bankruptcy protection wouldn't have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren't stayed or prevented from acting to seize or control the assets involved in those deals."

Mr. Autrey Speaks for Himself

Steve Autrey was one of those people who had been invited to testify before the House subcommittee yesterday.  He showed up, but he was was silenced when the committee decided he couldn't testify unless he signed a waiver permitting his credit card company to say whatever they wanted about his financial records.

But this isn't a Congressional committee, so, with Steve's permission, we can make his testimony a post on Credit Slips.  Comments are open to anyone.

Thanks, Steve, for telling your story. 

Credit Slips Goes to Washington

Today Katie Porter, Adam Levitin and I testified before the Financial Services subcommittee on Financial Institutions of the House Committee on Financial Services, along with Professor Larry Ausubel and four representatives of the credit card companies.  Congresswoman Maloney has sponsored a bill with 82 coauthors that would outlaw some of the worst credit card tricks and traps.

There's a lot to talk about, but I want to start our coverage with the four people who didn't get to talk. 

Credit Squeeze

BusinessWeek reports that more credit card issuers are refusing to cut interest rates to help out consumers in trouble. Until recently, if someone entered formal credit counseling, the card companies would often cut interest rates to zero to keep the customer paying. No longer, reports BusinessWeek.

This has at least three implications for the short term future of the economy:

One in Ten

The latest numbers are out:  One in ten homeowners has no equity in the family home. The data show that about 15% will be below water if prices continue to slide, owing more than their homes are worth.

So what's the plan here?  One in ten homeowners could just walk away right now. Indeed, most of them, if they were the rational maximizers so prominently featured in classical economic analysis, would stop paying now, put the money in a savings account and wait the 90 days or two years or whatever until the lender could force them out by foreclosure.  In non-recourse states, they could just pocket the money and walk away free and clear.  In other states, they might need bankruptcy or a last-ditch deal with the lender for a short sale. The economics of the deal shift when the homeowner has no equity to protect.

If they walk, the national--and world--economy will seize up.  The investors who hold those mortgages can avoid that if they are willing to share the pain and acknowledge that their loans are only partially secured. Like practical lenders have done for thousands of years, they could decide that getting a steady, partial payment is better than no payment at all.  So far, however, the investors are holding tight, even as Fed Chairman Bernake asks them please please please renegotiate these crazy mortgages. 

Vote on Tuesday

The pending bankruptcy amendment that would let judges make a downward adjustment on mortgages when the loan exceeds the value of the property goes to a vote in the Senate tomorrow. It will take 60 votes to push the bill forward.  The mortgage lenders think they can block it, giving the Republicans a chance to kill the bill through filibuster.

Larry Summers weighed in via his column in the Economist.  He supports the bill as a way to create a mechanism to get the borrowers into deals that are good for the borrowers and cheaper for the lenders.  He points out the the current ideas of jawboning the lenders just isn't working.  But he seems to be having some trouble with the details of how bankruptcy works.

The New Politics of Bankruptcy

Recently Albert Winn, a long-time Congressman from Maryland, was challenged in the primary for his seat. His opponent, Donna Edwards, campaigned on several issues, but among the most prominent was her opponent's vote for the 2005 bankruptcy legislation. He had ignored the needs of his constituents, she argued, and favored the financial interests whose executives (not coincidentally) gave his campaign financial support. Ms. Edwards defeated that incumbent in a landslide (60%-32%).

Last month, in a nationally televised debate among Sen. Edwards, Sen. Clinton, and Sen. Obama, Tim Russert essentially asked, How could two of you have voted for the 2003 legislation (much like the 2005 legislation), even though it never became law (because of a dispute within the Republican House caucus over the dischargeability of judgment debt arising from protests at abortion clinics)? Sen. Edwards immediately said that his vote for the bill was a mistake. Sen. Clinton expressed regret for the vote, adding she was glad it never had become law. Sen. Obama pointed out his steadfast opposition to the bill once he got into Congress.   

Why is a three-year-old, highly-technical set of amendments to an oten-obscure law now the stuff of popular political discussion? 

Thanks, Christian

Christian Weller has given us a very stimulating week. His big picture perspective on the economy, debt, deflation, and debt overhang has been made even more frightening by the data he cites.  I don't sleep well when I read Christian's work.  But I think it isn't more sleep that's needed right now.

Thanks for sharing your ideas with us, Christian.

Welcome, Christian Weller

It is my special pleasure to welcome Dr. Christian Weller to Credit Slips. First the formal stuff:  Dr. Weller is an Associate Professor of Public Policy at the University of Massachusetts Boston, a research scholar at the Political Economy Research Institute at the University of Massachusetts Amherst, and a Senior Fellow at Center for American Progress. A trained economist, he has also worked in policy positions in the US and Germany and in banking in Germany, Belgium and Poland. 

Now the stuff about his important contributions: Christian's expertise is in the area of retirement income security, macroeconomics, money and banking, and international finance. His work is numbers driven, but it is also quite readable. Check out his work here and here. 

Finally, the stuff that makes him really interesting: Christian's ideas are well-grounded both in data and theory, but they are also fresh and powerful. He is one of the best lunch dates around.  His posts on Credit Slips will give us all a chance to visit with him. Welcome, Christian.

Let Them Eat Crumbs

The Treasury Department has yet another voluntary plan to fix the mortgage meltdown.  This one gives families an extra thirty days to pack their belongings before they lose their homes to foreclosure.  For the 2 million families estimated to go into foreclosure this year, the mortgage industry, backed by the current administration says, in effect, "Let them eat crumbs."

The administration plan is, once again, voluntary, and only a half-dozen lenders have agreed.  What about the teaser-rate and sleaze-ball mortgages sold by everyone else? I guess those home owners had better pack fast.

The Future of Bank Fees

The Brits may be showing us the future on bank fees.  First, the pain:  British banks charge an average of $57 for an overdraft, about 70% more than US banks.  Second, the response:  A movement has swept across Britain to sue banks over the fees, claiming they are unfair.  The top five banks have already refunded $810 million, and the litigation marches on.  A huge test case is pending.

Consumer advocates claim that the cost to the bank of providing overdraft service is about $9 per transaction.  The litigation focuses on the applicability of consumer protection laws to bank services in the UK, but I confess that this makes me think about plain old contract law. The banking relationship is based on a contract, so what happened to the long-established contract principle that damages for breach must be reasonably related to actual or anticipated harm? Common law distinguishes a "penalty," which is unenforceable, from a more moderately priced liquidated damage clause, which is OK. $9 v $57 looks like a penalty unrelated to actual costs.  And, for the US banks, isn't the same true?  If an overdraft costs about $9 (processing, risk, etc.), doesn't a charge of $35 look like a penalty?

Profit Possibilities

One of the hardest things about teaching debtor-creditor law is keeping up with all the market innovations.  Subprime mortgages are in the spotlight, but credit card debt has not subsided. Last quarter credit card grew at a rapid 9.3%. For families looking for a way to get off the debt treadmill without declaring bankruptcy, a new industry has been born:  debt settlement companies.  These businesses promise to negotiate some debt write-down with the creditors.  But the negotiators too often take a customer's money and offer little relief. 

The industry is growing rapidly, but there are no regulations, no industry standards, and no one to turn to for help if the customer gets cheated. Will this become the next path to bankruptcy--a family hit a rough spot, faced a double-digit rise in interest rates, went to a debt consolidator, then ended up in bankruptcy with even more debt and fewer assets?

The Power of Numbers

When the credit industry lobbied Congress for adoption of the bankruptcy amendments, they made a powerful claim:  Bankruptcy costs every American family $400.  The number was pure fabrication, but the number was repeatedly quoted in newspapers, magazines and in Congress.  It offered elected representatives a lot of cover to explain to the folks back home how they could vote to sqeeze more money from working families and put it in the hands of a dozen or so credit card issuers. Adam Levitin shows us that another number has been drawn out of thin air:  the Mortgage Bankers Association claims that any amendment to the bankruptcy laws to deal with subprime mortgages will increase mortgage rates for all homeowners by two percentage points--recently dropped to 1.5 points.  Adam is doing a great job fighting back, but, as it was with the $400, academics don't have the same PR machine.

Now there's a third data claim:  Payday lending is good for families. Once again, the claim is wrong, but the industry is pushing it hard in the media.  Maybe only a small part of the academic world realizes the importance of data in legal policymaking, but private industry seems to understand very well the power of numbers. 

Same Solutions, Different Problems

Economists teach that if the economy is going into a recession, lower interest rates and give people money. That wisdom is so conventional that the only quibbling seems to be over timing, amount, and who gets the money.

But this recession has one very special feature:  Never in history have we hit a recession with the American consumer so loaded down with debt. Shouldn't that cause someone to pause before concluding that more consumer spending is the way out of this hole?

Between Life and Death, Bankruptcy Style

The Brits, in their understated way, are on the fast track to revolutionizing the balance between debtors and creditors.  With no public fanfare, the Ministry of Justice announced a plan for debtors to stop making payments on credit cards for up to a year if they had a change in circumstances, such as a job loss or divorce.  (BTW, job loss, medical problems and family break up are involved in 90% of US bankruptcies.) In effect, the debtor can stand somewhere between regular repayment and bankruptcy, getting the automatic stay, but not the discharge. 

There are no reports of mass heart attacks by lenders, no threats to halt all consumer lending, and no reported plague of locusts. 

Consumer Spending

As the country contemplates a recession, economists are wringing their hands over a slow-down in consumer buying.  About two-thirds of the economy is driven by consumer purchasing.  Without that engine, economists fear that the economy will be in serious trouble.

But I haven't read much about the role that debt will play in slowing down consumer spending--recession or no recession.  The staggering debt burden that American families are carrying should have everyone worried.  The math is easy:  Every dollar that goes to paying interest is a dollar that is not used to buy socks or movie tickets or double lattes.