Friday, February 11, 2005

Bailing out the Bringers of Bankruptcy

Via Dr. Atrios, we learn that "Bankruptcy Reform" is in the pipeline again.

Republican leaders in Congress began clearing the way yesterday for swift passage of legislation backed by the credit card industry and opposed by consumer groups that would make it harder for consumers to wipe out debt through bankruptcy.
This is just plain sick. The credit card industry is in no way being hurt by rising bankruptcy rates. In fact, as the article states, this last year has been "one of their most profitable years in more than a decade." Credit card divisions are typically the most profitable components of the financial institutions to which they belong. There is simply no affirmative evidence demonstrating the need to change the existing system.

This is especially true when you consider the reason most people file bankruptcy. These individuals typically incur debt that has arisen from unexpected medical and employment crises. It isn't irresponsibility that led them there. It's a combination of fate, low economic reserves, and usurious interest rates. Moreover, the whole reason that bankruptcy law exists in the first place is that it is economically disadvantageous for all of us to have otherwise responsible individuals trapped under an avalanche of debt. Does it make sense to change this equation so that the credit card industry might experience a slight increase in profits?

There's one other thing to consider as you evaluate this issue. Whenever a credit card company issues a credit card to an individual, they are, in essence, investing in that individual. The interest that they earn is justified by the depreciation of the value of the loan due to inflation AND the potential risk they are incurring. If these investments weren't risky, there is no way such outrageous interest rates would be tolerated.

But, for years now, the industry has been targeting a wider and wider pool of individuals, many of whom are clearly risky investments. These individuals are provided with high lines of credit and are encouraged, via advertising, to spend freely. Finally, the companies withhold information that would help their clients manage their debts responsibly (such as revealing how long it would take to erase a debt by paying the monthly minimum).

Now, if any other industry was making risky investments in shaky businesses, while at the same time giving those businesses poor financial advice, we would expect them to accept the negative consequences of their unscrupulous practices. We would laugh at the idea that it was our responsibility to bail them out. Yet, that is exactly what the credit card industry is asking us to do.

In truth, it doesn't matter how people are entering bankruptcy. The point is that the credit card industry has always been aware of that risk. If they didn't want to pay for the negative consequences of that risk, then they shouldn't have been loaning money to such high risk clients. If they're being hurt (which they are not) it is due to their own imprudent business practices. It isn't our job to clean up their mess.

Sadly, the third time is probably the charm on this issue. What with the fight brewing over Social Security reform, little political capital will remain to beat back this atrocity. It is an unpleasant truth that we must pick our battles and let others pass by uncontested. But, make no mistake about it -- this is a dirty deal that we will all pay for eventually.
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