Originally posted 10 August 2005. The subject came up in the last VP debate.
With all of the excitement coming out of Europe, the Middle East, and even Aruba, it’s easy to forget an important change that could impact many Americans in the very near future. After years of lobbying and overcoming populist sentiment, the US Congress passed and the President signed an overhaul in the US bankruptcy laws that will make it more difficult for individuals to seek protection under these laws.
US bankruptcy laws have been some of the most lenient on the planet. With businesses, as one attorney told me a long time ago, bankruptcy has been a “business strategy” rather than a last resort in many cases. For individuals, it has been a well-trod road to avoid losing everything. The road to where we were was long and difficult. Until early in the history of the republic, bankruptcy was a criminal offence, as it was in Britain and ancient Rome. (“Agree with thine adversary at once, whiles thou art in the way with him, lest thine adversary deliver thee to the judge, and the judge deliver thee to the minister, and then thou be cast into prison.” (Mt. 5:25)) Many places in the world, such as Georgia and Australia, were colonised with indentured servants, most of whom were in debt “workouts” that were usually brutal. From there we decriminalised bankruptcy and progressed to the regime we have today.
The “Greatest Generation,” with the “poor house” in memory, were loathe for bankruptcy and the extensive credit that led to it, but their children and grandchildren are of another mind altogether. Living in a culture that has lost its sense of “position,” the only way to demonstrate to others that one has arrived is to show wealth ostentatiously, to say nothing of the incessant drive for instant gratification. It’s a lot quicker to borrow the money than to do this with cash, so many borrow. Easier credit, both secured (first and second mortgages) and unsecured (credit cards,) has only fuelled this trend. The result has been record displays of wealth at all levels and the record bankruptcy rates to go with it. Compounding the problem has been the evaporation of savings and thrift, which is OK until disaster (medical emergencies, litigation, retirement) strikes.
We said the lenders fuelled this trend with expanded credit opportunities. The expansion of credit was frequently done without regard of credit worthiness, especially with unsecured credit. Rather than really checking lenders out, the credit card companies play a numbers game; their idea is to charge high enough interest rates (and they’re certainly high enough) to cover their deadbeats. Unfortunately the deadbeats, protected by our bankruptcy laws, started to outrun the credit card companies, and so the lenders sought relief from Congress, which they finally got.
Let’s make one thing clear: it is our opinion that debt, especially the levels of debt many Americans accumulate, is not good. “The rich ruleth over the poor, and the borrower is servant to the lender.” (Pr. 22:7) Debt reduces people’s independence; people cannot be really free and in debt the way they are in the US today. As a Christian, it is not right for people to fill the hole in their lives that only God can fill with stuff, but that is what is going on all too frequently.
On the other hand, the passage of the legislation as it stands is a recepie for social unrest.
Some of it was necessary: it was too easy for wealthy debtors to shield too many of their assets. And, as an inducement for people to lighten their debt load, this legislation has the potential to do good. But getting from here to there is not going to be fun.
To start with, tightening the bankruptcy laws will only make it easier for lenders to continue their “numbers game” of lending to credit unworthy people, since their downside risk has been reduced. Lenders could have achieved a similar result by tightening the access to credit by more selective lending; they could have even submitted to some kind of reregulation to accomplish this. But they have decided to throw the burden of “credit regulation” on borrowers rather than themselves.
Lenders are also counting on the continued perceived need of Americans to conspicuously consume (it is ingrained in our culture and in some ways our economic prosperity) rather than to save. From an economic standpoint, this can be endured in a prospering economy where wages are outrunning inflation. Unfortunately, as things stand now inflation is outrunning wages, by itself an incentive for consumer funk (as those of us alive in the 1970’s remember all too well.) Combined with rising interest rates, in a world where timing is everything, the timing of this legislation leaves a lot to be desired.
It is our opinion that the change in bankruptcy laws will come much quicker than changes in American attitudes towards consumption and debt. The result of this will be many more people who will find themselves on the wrong end of the credit system, and enough of those people around can and will be socially destabilising.
Back in ancient Israel, that power challenger with a difference, David, built his own armed force with people caught in the economic squeeze of the times: “David therefore departed thence, and escaped to the cave Adullam: and when his brethren and all his father’s house heard it, they went down thither to him. And every one that was in distress, and every one that was in debt, and every one that was discontented, gathered themselves unto him; and he became a captain over them: and there were with him about four hundred men.” (1 Sam. 22:1,2) Had David not been a man after God’s own heart (1 Sam. 13:14), his desperate band could have dispatched Saul sooner rather than having to wait for the Philistines to do the job later.
In a nation where so many live on the edge of financial ruin, the recent changes in our bankruptcy laws could spell trouble under the wrong conditions. We hope not, but it is always a dangerous policy to swell the ranks of those who have nothing to lose.