Protecting Whom Exactly?

Credit card companies and the banks that issue credit cards have been trying for the past couple years to change some personal bankruptcy laws in the USA. They want to make it tougher for people to jettison unsecured loans, meaning credit card debt.

House Resolution 333, sponsored by George Gekas of Pennsylvania, has a great title: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2001. Who could argue with that? I'm all for personal responsibility. I don't want bankruptcy abused. There are risks in financial in seeking credit, and bankruptcy is the legal remedy and severe penalty people face for not meeting that obligation. Unfortunately, what this bill shows is that the credit card companies want to do everything possible to minimize their part of the risk.

Here's a news bulletin for any bank that ever issued a Visa or MasterCard: this is why we call it unsecured debt! This is why you get to charge 17% or more annual interest rates.

This bill is not about bankruptcy abuse, it's simply an attempt to make an addition to the myriad ways credit card companies screw their customers all the time.

Besides, if we want to talk about abuse when it comes to defaulting on financial obligations, let's make a couple comparisons. The total chapter 7 bankruptcy receipts for 1998 added to $1.6 billion. That same year, the Long Term Capital Management hedge fund found itself in grave danger of going belly-up. Alan Greenspan and the Federal Reserve engineered a $3.5 billion bailout of LTCM. We're not talking about some poor shmoes who can't figure out their credit card statements - there were Nobel prize wining economists running LTCM. But the US government helped bail then out.

What's worse is that John Meriweather, founder of LTCM, has started a new hedge-fund with $250 million. Not a bad turnaround, huh? Try asking the 31,000 people who filed under Chapter 7 in 1998 how big a credit line they can get today.

Don't think that I'm some knee-jerk anti-corporate personality, I love free markets. I'd vote anytime to remove farm subsidies or blow away tariffs on steel or sugar. As an example of a business friendly group that viewed teh LTCM bailout critcially, I offer the libertarian Cato Institute's brief on LTCM.

To be fair, I should also point out this Cato brief on personal bankruptcy which advocates some reform, but more of an alternative to Chapter 7 than an attempt to block access to chapter 7 for many Americans. however, I do take issue with the author's citing that there is an increase in consumer's likelihood of declaring bankruptcy when they benefit more from it financially. I mean, what's the point of pointing that out? That is not evidence of bankruptcy abuse; it is evidence of an economic truism: marginal changes in consumer benefit lead to changes in consumer behavior.

Face it, this Consumer Protection Act of 2001 seems like the kind of protection the Sopranos might offer you. If credit card companies want to rdeuce their exposure to bad credit risks, they should stop stuffing all of our mail boxes with offers for more and more credit. Or if they do pass this bill to protect consumers from paying for other people's defaults, they should lower interest rates on cards to reflect the new lower risk premium for the debt.

I can hear them laughing now.