One of the best features of the New Yorker is James Surowiecki’s Financial Page. This week he has a great article on the foolishness of our punitive bankruptcy law. Go read it; it’s just a page long.
But in case you don’t: credit card companies a few years ago fantasized a “bankruptcy crisis”. Bankruptcies, they pointed out, doubled between 1995 and 2004. They didn’t emphasize that in the same period, their profits tripled. Congresscreatures tut-tutted and passed a law making bankruptcy harder. Bush promised that the law would make credit “more affordable”; naturally he was wrong– credit card rates and fees haven’t fallen.
Now that the economy is tanking, the bankruptcy law is going to cause real harm. Simply put, it’s lousy policy to drag out failure. It will decrease entrepreneurship, since lenient bankruptcy laws make it easier to start over if a business fails, thus making it less risky to start one up. It creates a disincentive to work, since a higher income just means more money going to creditors. And by making credit card debt harder to avoid than mortgages, it’s added to the housing crisis.
The real puzzle here is how we get a law that’s bad for more people than it helps. Do a majority of voters really favor laws that make their situation worse?
It’s not just lobbyists getting what they want from the Money Party. The law fits a certain punitive, even self-punitive streak in conservativism. Sometimes this is dignified as “moral hazard”. The bankruptcy (sorry) of this line of thought is shown by the lack of concern for the moral hazard of executives. The CEOs who brought on the mortgage meltdown will get multi-million-dollar rewards; firms like Bear Stearns that speculated irresponsibly get bailed out with taxpayer money.