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Tuesday, April 01, 2008

Not Too Big to Fail

How's the new bankruptcy law working out?:

Going for Broke, by James Surowiecki: In recent months, a lot of people have been handed financial get-out-of-jail-free cards. C.E.O.s who presided over billions in losses have walked away with tens of millions in compensation. The Federal Reserve has showered cheap money on banks and brokerages. ... But there’s one group for whom forgiveness has not been forthcoming: ordinary consumers struggling with piles of credit-card debt. ...

That’s because of a law that Congress passed in 2005 which has made it more difficult for people to write off their debts. ... Cracking down on those who “abused the bankruptcy laws,” President Bush said, would ... “make credit more affordable.” And we’d all be better off.

So are we? ... The law did slash the number of bankruptcies—they fell by sixty-two per cent between 2004 and 2006. And the credit-card companies ... profits rose thirty per cent between 2005 and 2007. But the law hasn’t done much for anyone else. Interest rates and credit-card fees have not fallen as promised. And for debtors life has become significantly harder...

One might say: so what? Even if bankruptcy is sometimes precipitated by bad luck or by an economic downturn, ... why should they get away scot-free while the rest of us pay our bills? It’s a fair question. But there’s a reason we did away with debtors’ prisons...

Making it harder for people to discharge their credit-card debts has other drawbacks as well. Homeowners would once do almost anything to keep up payments on their homes, even if it meant falling behind on other debts. In the past year, though, economists have reported an increase in the number of people who are just walking away from their homes, because it’s now often easier to abandon a mortgage than a credit-card bill. ... So the new law may very well have exacerbated the housing crisis.

    Posted by on Tuesday, April 1, 2008 at 10:54 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (33)

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