Notes on the bankruptcy bill

Why should irresponsible creditors be favored over irresponsible debtors?

1. The primary moral argument made in favor of the bankruptcy bill just rammed through the Senate 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. 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.

Update: For once, Glenn Reynolds and I are on the same page. It’s really, really too bad the 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.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: