Notes on the Bankruptcy Bill

1. The primary moral argument made in favor of the bankruptcy bill just about to be rammed through the House is that holding people to their debts represents a move back toward "personal responsibility." That seems like a fairly odd bit of reasoning, given that there are always two sides to a transaction.

As Glenn Reynolds asks: Why is it that we should punish irresponsibility on the part of the debtors and reward irresponsibility on the part of the creditors? If consumers were perfectly rational, credit card companies could never damage them by offering credit. But if my grandmother had testicles, she'd be my grandfather. In a world of imperfect rationality, the mechanism of tempting and being tempted isn't hard to understand. The new law rewards the tempters and punishes those they have tempted.

Isn't it good to know that every Republican in the Senate sides with Satan rather than Eve? And what does the Christian Coalition think about that?

2. Putting aside any natural sympathy one might have for debtors as against their banks, the bankruptcy bill has the curious feature that it changes the rules under which existing contracts are adjudicated. Thus debtors who go bankrupt next year will have to repay money borrowed three years ago under the new rules rather than the old rules.

In addition to the question of equity involved here, there's an efficacy question. The argument for tightening the bankruptcy rules is that, by reducing lenders' default costs, the change will tend to make it easier to borrow, either in terms of lower rates or increased credit access. But note that the windfall to the creditors from changing the rules on existing debt — unlike the creditors' gains with respect to newly-lent money — can't logically have that benefit, as long as we assume that the firms are forward-looking rather than backward-looking in their decision-making.

3. Doesn't it give you a warm feeling to know that the Republicans voted to allow the abortion-clinic bombers and vandals — authors of the most successful terrorist campaign America has seen since the rise of the Klan — to use bankruptcy to protect their assets from civil judgments against them?

4. Anyone who doubts that money talks in Washington has a lot of explaining to do.

It's really, really too bad the Senate Democrats couldn't stick together on this one to make it a clean partisan issue. It looks to me like a clear winner. It would still make sense for the Democratic Presidential nominee for 2008 to make repealing this monstrosity a theme.

Article Author: Mark Kleiman

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