Abigail's Magic Garden

Bankruptcy reform: screw the poor

Noticing that my recent post on the credit card industry has received the attention of a certain well known right wing blogger, I thought this would be a good time to comment about bankruptcy.

The goal of bankruptcy protection is to give people who have screwed up a “fresh start.” One of the few powers granted to Congress in Article I Section 8 of the Constitution is the power to create bankruptcy laws.

Our bankruptcy laws do have a major problem. The problem is that there are loopholes that allow rich people to shield assets from bankruptcy. One of these loopholes involves owning an expensive home in a state, like Florida, that grants an unlimited “homestead exemption.” And the other loophole involves trusts. A person should be allowed to file for bankruptcy, have all his debts absolved, and keep a small amount of money needed to restart his financial life. But getting to keep a multi-million dollar trust or house in Florida is basically a theft from creditors. Congress should do something to fix this problem.

But the Republicans, who seem to care only about the top ten percent and not the bottom ninety percent, are content to let their fellow fat cats take advantage of these outrageous loopholes and instead are going after the average person and trying to deny him his fresh start.

The problem for those opposed to this regressive reform is that too many people think that bankruptcy is somehow immoral and they relish the idea of punishing people who have gotten themselves into too much debt. But this is not true, bankruptcy is no more immoral than any other form of insurance.

When you buy your auto insurance policy, you can pay extra for a plan where the insurance company will reimburse you for damages to your car even if the accident was your own fault. Is it immoral to claim the insurance money if you crash your car because of your own bad driving? No, because you paid for it and the insurance company calculated a price such that on average it will make a profit on the policy. Insurance is a win-win commercial transaction.

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.

The second type of loan is the only type of loan that lenders are allowed to make. This is what the bankruptcy laws provide. The first type of loan is considered to be void as against public policy.

The credit card industry is the major sponsor of bankruptcy reform. They say they are losing money from too many bankruptcies being filed. Yet it’s their own fault for lending money to low risk lenders. Or one can more simply say this is the natural result of free market competition. When a product becomes a commodity, and a Visa credit card has become exactly that, then the profit margin associated with the commodity product sinks to near zero.

Anyone who understands economics can easily predict that changing the bankruptcy laws to prevent people from filing under Chapter 7 will only create a temporary profit spike for credit card issuers. Soon after, the internecine competition between credit card issuers will cause them to lower interest rates, increase marketing, and go after marginal borrowers who would not have been granted a credit card under the current bankruptcy laws. The end result is that profits for banks involved in the credit card scam go back down to where they are now, but in the process a lot of poor people will be totally screwed, trapped in debt that can no longer be relieved through bankruptcy. We will create a whole new underclass of indentured servants.

It's funny how the Republicans, who claim to be in favor of free market competition, are the ones trying to protect their rich donors from the hard reality of the free market.

The relative nature of wealth

In comments, people have made an argument in the nature of “if you were making a hundred thousand dollars a year, and you saw how much money you had to pay in taxes, then you would support tax cuts and you’d stop being a liberal.”

But what people who say stuff like that don’t seem to realize is that wealth is relative. They imagine how much better off they would be compared to everyone else if their taxes were cut but everyone else continued to pay the same taxes. The joy of having one or two extra material possessions is greatly diminished when everyone else also has one or two extra material possessions.

One thing a tax cut would not allow you to afford is a better house. Because housing prices are dictated by the fact that there are a limited supply of housing units, and supply increases only slowly because not only do they take a long time to build, but local communities have anti-growth laws that prohibit enough new houses from being built to satiate demand. So if everyone had some extra money, they’d bid up the price of existing houses, and everyone would wind up living in the same house they were in before.

The huge increase in housing prices since Bush took office is partially a result of the Bush tax cuts.

The stuff people feel they “need” in order to be happy is actually an illusion created by the TV commercials they watch and the things they see other people owning. In 1950, did anyone think that they needed a huge plasma screen TV to be happy? No, all they needed to be happy was a black and white TV that was massively oversized in proportion to its tiny screen.

Once people have enough money to buy basic food and shelter, all other happiness from extra money comes from the joy of winning the rat race and having more than your neighbors.

Tax cuts for the wealthy don’t really make the wealthy any happier because their relative wealth remains the same. On the other hand, extra money for the poor can make a huge difference in their lives if they don’t know where their next meal is coming from, or if they might be evicted from their apartment, or if they can’t afford to see a doctor when they’re sick.

The credit card industry needs regulation

Kevin Drum rightly complains about the unfair policies of the credit card industry. Quoting from the LA Times:

According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.

The exhorbitant late fees, found in the fine print of the credit card agreements, are designed to trick honest customers into paying extra money. They go far beyond what it actually costs the credit card company when a customer pays a few days late. All of my utility providers seem to be able to make a profit just fine without charging a $25 late fee.

Although one hates to recommend government regulation, we see that the unregulated free market has failed the consumer. Both the consumer and the credit card industry itself would benefit from fair and uniform standards.

If under tighter uniform rules, some consumers would no longer qualify for credit cards, well that would be to their benefit, because they would be relieved of the temptation to spend beyond their means.

UPDATE

Read my post about bankruptcy reform.

Conservative bias at CNN

Skippy has an excellent post about conservative bias over at CNN:

judy [woodruff] has begun airing a new segment on her show called "inside the blogs." during this small 2 minute piece, "blog reporter" jacki schechner and producer abbi tatton sit at two computers and read blogs.

…

hold on to your seats now, because we're sure that the following will come as a shock to you, but during the past 15 days, "inside the blogs" has mentioned, quoted, or otherwise referenced literally twice as many conservative blogs as liberal blogs. and that's with the widest possible definition of 'liberal' we can use with a straight face.

In a followup post, Skippy publishes the letter he sent to Judy Woodruff.

Carly Fiorina to head World Bank

We are told that Carly Fiorina, the former CEO of Hewlett-Packard, is at the top of the short list to head the World Bank. Reuters.

When a regular worker is fired for doing a bad job, she is screwed because no one wants to hire the worker with a bad track record. But when someone at the top is fired for doing a bad job, she gets $21.4 million of severance pay (source: Bloomberg), and then less than a month later she is at the top of the short list to head the World Bank, even though she has no experience in banking or international development.

When I previously suggested that workers receive twenty weeks notice before being let go, various commenters complained that such a requirement would be too hard on the employer. Yet we see that for people at the top who get fired for doing a bad job, the same companies that can’t afford to take care of their workers can afford a ridiculously lavish severance package. Even though, based upon how easily they find new jobs and how much money they were making before they were fired, they don’t seem to need any severance package at all.

The sinister purpose behind private accounts

As I explained before, the richest one percent need to convince the rest of America that their interests are the same as those in the top one percent. And obviously they have been very successful, because according to a poll from 2000, 39% of Americans either think their incomes are currently in the top one percent, or that they will be there someday.

Private accounts are another part of the plan to “brainwash” American voters into voting for pro-big business candidates. By forcing stock ownership upon all Americans, there will be some who will delude themselves into thinking they are part of a higher class and that they should vote for pro-big business Republicans.

Matthew Yglesias blogged about this a few days ago, and he was not convinced. He said that “[s]tocks are not, in other words, some kind of magic fairy dust that creates conservatives.” But I disagree. It’s very easy to convince people they are richer than they are. People want to believe they are better off than they really are, so they just need a little shove in the right direction.

There are two other selfish reasons why the rich like private accounts: (1) The financial services industry will make money managing the mutual funds in which people with private accounts will invest their money. (2) New inflows into the stock market will pump up stock prices, allowing the rich to sell the stocks they currently own at a bigger profit. In some ways, bull markets are like naturally occurring Ponzi schemes in which the last ones in will be the ones who get screwed the most.

Should stupid people eat cat food in their retirement?

I would start by saying the answer should be "no." But Kender wrote in a comment on my blog:

Just rememeber that it is your money and you need to be smart with it. Be a dumbass with it and suffer the consequences.

See? It is a simple system.
Smart=good
Stupid=bad

Smart=house and good food
Stupid=cardboard box and cat food

We need to be honest and acknowledge that many lack the intelligence and wisdom to plan successfully for their retirement. And furthermore, people don't choose to be "stupid," as Kender seems to imply, that's just the way they are. Studies of identical twins reared apart show that intelligence is a trait strongly influenced by one's genes.

I don't accept Kender's philosophy that people should be forced to eat cat food in their retirement based on factors they can't control. Our Social Security system ensures that all of our citizens, who have done their best to contribute during their working years, will have an acceptable standard of living in their retirement.

Working at Walmart

Amygdala, who claims to be some kind of conservative, gives us a more honest assessment of working at Walmart:

[Conservative blogger] Hewitt has clearly never worked in a Wal-Mart type operation; the notion that many or most of the jobs either are "good jobs" or have "good wages," not to mention that they have "advancement possibilities" that most people would find desirable, is asinine. They're low-paying mind-numbing jobs with as much opportunity for advance (and enjoyment in your work) as comes working at McDonalds.

I couldn't agree more. I get really mad when conservatives try to pretend that Walmart is doing a great service for its employees when all it's doing is taking advantage of their willingness to work cheap because they can't find a better job.

The best that can be said about Walmart is that they aren't violating any laws. If that's truly the case. I've observed that many big employers of low wage hourly employees try to take advantage of them by getting them to work some extra time each day off the clock, as if their normal hourly rate isn't cheap enough.

UPDATE

The blogger from Amygdala informs me that he's not a conservative. I guess I optimistically hoped that I had actually found a conservative who acknowledge the fact that Walmart jobs are actually lousy dead end jobs. I'll just have to keep looking.

Prominent bear quits Wall Street

Also in today's WSJ (free link!) we are informed that David Shulman, "[o]ne of Wall Street's most high-profile bears during the stock market's bull run in the 1990s -- and more recently a big bear during the real-estate boom," is quitting.

The following quote is interesting:

Such strongly held, and loudly voiced, views about a stock or market's downside have been notably rare over the years. In general, Wall Street abhors a bear, or at least doesn't seem to hire many of them to prominent positions, and Mr. Shulman's career shows how hard it is to be a skeptic among professional supporters.

"Wall Street is in the business of selling stocks," says Michael Metz, the chief investment strategist at Oppenheimer Holdings Inc.'s Oppenheimer & Co., who was another prominent bear during the 1990s. "You don't want to be too negative on your products. People want to hear upbeat, good news. You have a better chance of being heard if you're bullish. If you're bearish and right, people hate you. If you're bearish and wrong, people laugh at you. You can't win."

The above quote gives give us what I think is a very important insight into human nature, especially as it's played out in the United States. Only optimistic thinking is allowed. Realistic thinking is frowned upon.

Optimistic thinking benefits the wealthy because average voters overoptimistically think that they too will someday be wealthy, and vote according to their unrealistically hoped for future interests rather than their current and more likely future interests. Read my post about how 39% unrealistically think they are part of the top one percent.

And also, our politicians constantly bombard us with overoptimistic projections about the budget deficit, how inexpensive it will be to occupy Iraq, and how much benefit people will get from private accounts (see my previous post). Anyone who adds a dose of reality to the conversation is frowned upon.

Bush's stock market projections overoptimistic

An article in today's WSJ (subscription required) suggests that Bush's projections for stock market returns on the "private accounts" are overoptimistic:

A number of prominent economists have two problems with Mr. Bush's pitch. First, they say it's too optimistic about the long-term prospects for stocks. Second, it ignores an irrefutable rule of finance: There is no free lunch. Or, put another way, greater returns bear greater risks.

"You can't just sort of invent free return," says William Dudley, chief U.S. economist at Goldman Sachs Group Inc. in New York. "If it was that easy, you wouldn't have a Social Security problem in the first place."

Bush always stretches the truth to support his right wing agenda.