The Bankruptcy Reform I Told You So

Remember that one time in 2005 when Congress did the bidding of the credit card companies and passed a bankruptcy reform law? It was supposed to help credit card companies and other financiers of short term credit mitigate the abuses of the bankruptcy system. In return there was an explicit (by my recollection) reciprocation offered by said firms to lower rates and fees associated with their business line.

That seemed like a load of bull crap from the start but the GOP controlled Congress was on a roll back then and the bill written by the same firms that would benefit from its passage was passed and signed into law. It even had plenty of help from moderate Dems like some guy named Ted Strickland. The whole sordid affair of the influence peddling in the case of this wretched law has been well documented in books like The Broken Branch by Ornstein and Mann.

Fast forward to 2008 were the stories of our collective economic anxiety and oil price angst fill pages of newsprint on a daily basis. The NYT ran a piece on the strangle hold that credit providers maintain over their hapless borrowers and the massive growth of revenue generated from the endless credit cards and loans that we consumerist Americans seem to be so addicted to. The payoff is the empirical indication that the bankruptcy reform law did not save us money but rather made money for it's supporters. The article cites a study conducted at a little known institution called Harvard University:

Not surprisingly, such practices generated dazzling profits for the nation’s financial companies. And since 2005, when the bankruptcy law was changed, the credit card industry has increased its earnings 25 percent, according to a new study by Michael Simkovic, a former James M. Olin fellow in Law and Economics at Harvard Law School.

The“2005 bankruptcy reform benefited credit card companies and hurt their customers,” Mr. Simkovic concluded in his study. He said that even though sponsors of the bankruptcy bill promised that consumers would benefit from lower borrowing costs as delinquent borrowers were held more accountable, the cost of borrowing from credit card companies has actually increased anywhere from 5 percent to 17 percent.

What can we learn from this? The current economic malaise that hovers around us has some root in the supplication of special interests as was the clear case with the 2005 law on bankruptcy reform. The lobbyists and campaign advisers that candidate X prefers to surround themselves with makes a difference to the poor saps that may end up at the wrong end of special interest crafted policies. A real critical difference if you are just trying to ride out the current economic tempest.