Sunday, March 06, 2005

VIA ABIGAIL'S MAGIC GARDEN, I came across a post by Glenn Reynolds on Instapundit.com about the anti-bankruptcy protection bill. Instapundit is a conservative blog, but Reynolds is against the legislation. He takes the refreshing view that if individual consumers are expected to accept personal responsibility for taking out credit cards that they can't afford, then the banking industry should be expected to accept responsibility for giving credit cards to people they know are poor risks.

I'm deeply skeptical of the bankruptcy bill in front of Congress now, and this report on credit-card industry practices goes a long way toward explaining why. Credit extended to people who can't handle it, absurd hidden fees, high interest rates, etc.: There's a lot of scamming here. The argument, of course, is that people who sign up for credit card accounts ought to know what they're getting into. But shouldn't the companies that extend credit to people who obviously can't handle it be held to the same standard?

And Abigail's post linking to Instapundit makes an interesting point as well. It's a mistake to think that people who file for Chapter 7 bankruptcy are unethical deadbeats. The credit card companies insure themselves against consumers who default on their loans, by charging them higher interest rates -- just as car owners can pay extra money for an insurance policy that will pay them if their car is damaged in an accident, even when the accident is their fault.

What people don’t understand is that every contract to borrow money has an implied insurance policy built into it. Imagine if you walked into a bank to borrow money, and you were offered two loans. The first loan had a lower interest rate. The second loan had a higher interest rate, but it included a special type of insurance—if you somehow got into financial trouble after taking out the loan, so long as you intended to pay the loan back when you first took it out, you could be absolved from the debt. Is it immoral to take advantage of this loan provision if you need to? No, because it’s just like the car insurance. The lender prices the loan such that, on average, it makes a profit.

Abigail also points out the cavernous loophole in the bankruptcy destruction bill for wealthy borrowers. If you have assets, such as an expensive home, in another state, you can shield those assets from being seized in a bankruptcy. Such options are not open to low-income and middle-income people.

Unfortunately, given the fact that Joe Biden is a major sponsor of this legislative disaster, one cannot put the entire onus for it on Republicans. It seems that, in this case, both Democrats and Republicans in Congress think the risk inherent in a free market economy is not applicable to wealthy borrowers or to the banks that deliberately extend loans to high-risk customers.

1 comment:

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