« The Bankruptcy Reform Act--Posner | Main | Response on Bankruptcy Reform_BECKER »



Feed You can follow this conversation by subscribing to the comment feed for this post.


First of all I have to say that I agree with your rejection of many arguments against this bancruptcy reform. In particular this liberal tendency (and I tend to be a liberal myself) to identify high profits with some special moral impropriety seems based on nothing more than an incorrect anthropomorphization of corporations. I for one can't see the slightest difference between a company that acts 'badly' to cut severe losses or to boost profits.

So I'm perfectly willing to grant that rational (in an economic profit maximizing sense) consumers would be made better off by making bancruptcy more difficult. However, many compelling studies have shown that people are deeply and intrinsicly irrational about probabilities and risk in general (see Kahnerman and Tversky 1982 which demonstrates people's extremely poor performance reasoning about probability). Since we know people are very bad at reasoning about risk, especially small probability but large impact events (like a medical emergency and the financial impact thereof) it only makes sense to present the true cost of debt in a fashion that consumers can understand.

In short by making bancruptcy easy we are essentially forcing people to buy debt insurance paid for in interest rates on their credit. This isn't some slur about the intelligence of the poor but just a recognition that people reason much better about upfront costs than small probability but large impact risks. Finally, since people's ability to make the judgements and reason about debt is fairly easily testable how about we actually do the research and see how the poor deal with risk rather than just assuming they will act rationally and changing the system on this assumption?

Moreover, your response about debtors prison is unconvincing. The fact that debtors in general would not want to enforce debtors prison in no way rebuts the argument that your form of argument would support debtors prison if it didn't turn out to be a discouragement to borrowing. Also restricting attention to debtors prison ignores the broader point. This very same form of argument, the harder bancruptcy is the less loss creditors suffer and hence the better off debtors and the poor turn out to be, would support making bancruptcy arbitrarily hard.

I suspect you would cry hold at some point and say it should be this hard and no harder to declare bancruptcy (i.e. you won't go all the way to debtors prison). Now as I see it there are two possible explanations for why your arguments starts to fail at some point.

1) At some point the consequences of being overburdened with debt (e.g. wages garnished forever) becomes so burdensome that people actually become less likely to borrow and this is bad for the creditors.

In response I am firstly lead to ask why we are suddenly considering what is good with the creditors. Priorly the argument was all about what is good for consumers so you need to also establish that not only do the creditors not benefit past some point but they would pass that cost on to the consumer. However, even if you meet this burden (which I think you might be able to) you need to explain why we should believe we are not already beyond this tipping point.

In short why is it that you think abolishing debt relief in bancruptcy alltogether (wages garnished for life) is going too far but we haven't gone far enough yet. I have yet to see the slightest reason to believe that the tipping point comes somewhere between where the new law is taking us and no debt relief whatsoever.

2) Alternativly you might argue that some form of debt relief is needed to relieve the burden on students, the young or other people who act irresponsibly. However, this approach requires you admit that we need laws to protect us from the consumers irrationality. Once again you need to meet the challenge of showing why we have erred by ascribing too much rather than too little irrationality to the consumer.


Also I find your logic in this comment very unconvincing.

Moreover, commenters who worry that the poor are inveigled into borrowing more than they can afford should favor the tightening up of bankruptcy, because it will deter borrowing by people who realize they're in danger of overborrowing and going broke. Liberals may think the poor too dumb to realize this, but I disagree.

Note that the very worry presupposes that people act irrationally about debt. If it is true that people are somehow being 'inveigled' to take on debt this means they are being somehow manipulated so as to ignore or disregard their own rational financial interest. Given this premise it is hardly convincing just to insist that they will start acting rationally in response to tough bancruptcy laws. Perhaps you meant to dispute the premise alltogether and assert that people are usually fairly rational and reasonable about taking on debt but once you grant the premise your response seems unconvincing.

Moreover, even if true I think this response avoids the true concern raised by this argument. People who bring up this argument are not merely trying to minimize the amount of debt that poor people take up rather they are trying to minimize the negative effects of that debt. In other words even if it is true that you reduce the total amount of poor people who end up with too much debt it isn't clear you have met their criticism supposing that those poor people who still do end up overburdened with debt are much worse off because bancruptcy is harder.

Moreover, since the dependence of utility on money is well known to be sublinear (logarithmic is a good approximation) not to mention the severe psychological burden being in debt accrues it is quite plausible that in total utility is lost since those in great debt (at the low end of the utility graph where the derivitive is high) are made worse off while the benefit is shared by all creditors including many not so badly off (where the utility derivitive is lower).


The issue with the demonstrably large profits
of the Credit Card Industry leaders is not
just a crazy liberal demonizing of corporations.
Quit worrying about the culture war for just one
second and think about the implications of the
blanket assertions you are relying on.

Think of profitability as evidence of the
relative competition in the industry. If there are but a few major players, each making high profit margins, it is obvious that "competition"
is not restraining the particular marketplace in
a real sense.

As competition increases, profit margins shrink
towards cost. Last year, MBNA made 5 Billion in
profits against which it wrote off 1 Billion in
"possible credit losses" due to bankruptcy. It
is a rational assertion from these facts that
MBNA's profits are not responsive to competition.
There is in fact a cartel of "like business practices" among CCC's large enough to matter.

You can recite the word "competition" as many times as you want and still not summon a spirit capable of inducing MBNA, BofA, Chase, and Citi to compete to their mutual detriment. These companies spent as much in advertising and postage (on those constant mailings we all get) last year as they lost to Banktuptcy. If competition and cost were a motivating concern for them, they would as least try to reduce their marketing budget by not sending mail to pets, children, and prior bankrupts.

The major credit card industry is disfunctional and deserves to be regulated, not given Billion dollar welfare laws.


I think the major gripe here with the law is that it's just tightening the noose on consumers without any concessions from the credit card industry towards usurious interest rates. This bill is not about competition either since the credit card companies really don't compete against each other to the point where they're ever at risk of losing profits.
While it's a move that may give more data on how bankruptcy works in the short term, the moral solution would involve a more complete bill that would cap interest rates on credit cards somewhere as well. As it stands, the bill's good points are being overshadowed by its disproportionate effects on the middle and lower classes while still letting upper classes declare bankruptcy more easily.

Elizabeth Warren

Judge Richard Posner and economist Gary Becker have joined the ranks of academic bloggers that have turned their considerable intellects to the topic of bankruptcy reform. I expected a real treat, but their recent comments on the pending bankruptcy bill are so out of touch (and out of date) that I was amazed to see them advanced. Posner and Beckers entire discussion rests on the standard chestnut that the bankruptcy bill will benefit consumers because it will reduce creditors risk and therefore cut interest rates. That argument not only ignores twenty years of data; it also perpetuates a plodding perfect markets model of consumer credit that most theorists have long since abandoned.

Start with a brief look at the data. Bankruptcy write offs represent about half of the total bad debt writes, which would suggest that they ranged from 1% in 1985 to 2.5% in 1992. Much larger is the cost of funds, which is the amount companies must pay to borrow the money they lend out. From 1980 to 1992, that cost fell from 13.4% to 3.5%, a stunning decrease in costs. What happened to the interest rates the companies charged? In the same time period, the average credit card interest rate rose from 17.3% to 17.8%. Move the clock forward a bit. When the cost of funds dropped nine times in 2001, instead of passing along the cost savings, the credit card companies pocketed a windfall of $10 billion in a single year. So much for the idea that the credit card companies are lined up to pass savings along to the customers.

Posner and Becker imagine a credit card market that simply does not exist. A WSJ piece by Mitchell Pacelle described a changing market:

Until the early 1990s, most banks offered one main credit-card product. It typically carried an annual interest rate of about 18 percent and an annual fee of $25. Cardholders who paid late or strayed over their credit limit were charged modest fees. Profits from good customers covered losses from those who defaulted.
Then card issuers, in an effort to grab market share, began scrapping annual fees and vying to offer the lowest annual interest rates. They junked simple pricing models in favor of complex ones they say were tailored to cardholders' risk and behavior.

According to the WSJ, a typical credit card contract was little more than a page 20 years ago [but runs] to 30 pages or more of small print today. Universal default, undisclosed penalty rates, arbitration clauses, undisclosed amortization ratesthe combination of complex language and missing terms makes the contracts indecipherable even for those who have secret decoder rings. The credit card companies have fought like tigers to avoid telling customers the basicsif you make the minimum monthly payment, youll pay $xx in interest and it will take you xx years to pay it off. This non-closure is so that credit card companies can compete to lower fees?

A number of younger economists have explored credit card pricing, developing a much more nuanced theory of how it exploits lack of consumer information and systematic cognitive errors. Oren Bar-Gill penned a detailed analysis of how credit card companies use dozens of tricks in their contracts to encourage customers to underestimate costs and overestimate their repayment schedules. He shows that even in a competitive market, these pracrices can lead to welfare losses. Lawrence Ausubel has demonstrated that, while people will shop for introductory interest rates, they are far less likely to re-shop when new fees and penalty rates are imposed on them. A recent article in the Quarterly Journal of Economics by Stefan Della Vigna and Ulrike Malmendier examines pricing strategies in various consumer markets and concludes, for all types of goods firms introduce switching costs and charge back-loaded fees. The contractual design targets consumer misperception of future consumption and underestimation of the renewal probability. The predictions of the theory match the empirical contract design in the credit card, gambling, health club, life insurance, mail order, mobile phone, and vacation time-sharing industries. The lesson is clear: credit card companies can maximize profits by pricing introductory rates competitively and then hitting customers hard later on with fees and penalties. And that model certainly seems to fit the data on revenues. Today, credit card fees and late charges amount to $50 billionabout half of all credit card revenues.

If Posner and Becker wanted to put their simple model to good use describing a perfect market, then why didnt they question why the proposed changes in the bankruptcy laws would apply to all outstanding debt? Existing credit card debt was priced based on current laws. Billions of dollars are outstanding in fixed-term loans. The bankruptcy bill would change the terms of those loans by limiting the availability of the bankruptcy dischargea nice windfall for the creditors who face lower risks. If the law isnt designed to be a give-away to the creditors, why not make the new rules applicable only to loans made after the effective date of any amendments-when those new, low Posner-Becker interest rates will be in effect?

The credit card companies didnt spend tens of millions of dollars for campaign contributions and high-dollar lobbyists so that they could pass legislation to save money for their customers. They paid for a law that will let them squeeze ordinary working folks harder. They want a law that will maximize profits from their richest sourcethose who stumble. And if that law put more people directly in the line of file when they lose their jobs or get sick or get called up to military duty, thats just the way it works when the companies have the power to write the laws. The credit card companies want a law that will give people caught in 35.99% hell no chance to escape, no matter what.

Posner and Becker talk at length about debtors willingness to incur credit, but nothing in the bankruptcy bill distinguishes credit issued for a fabulous vacation and credit issued to cover hospital bills or put food on the table during a long spell of unemployment. It is all treated the same, which undercuts the Posner-Becker notion that consumers have their fate in their own hands every time they sign a credit slip. Europeans have universal health insurance, better unemployment protection, and tougher bankruptcy laws; to make the bankruptcy laws in the U.S. tougher when shrinking health insurance coverage and growing unemployment and outsourcing tear away at middle class families is simply to ignore facts that dont fit the model.

I know that it is fun to think of every market in terms of simple if I had a nickel and you had a banana models, but when Congress is on the verge of passing a massive give-away to credit card companies, a little more realism seems called for.

-- Elizabeth Warren

Fred Polvere

Re: What Professor Warren wrote above.

Judge Posner

In the scenario you describe, interest rates should have already gone down due to the low cost of funds but, in fact, they have risen.

I am sure you are aware of the work of New York State Attorney General Eliot Spitzer. He has uncovered myriad cases of collusion, price fixing and illegal activity that benefit a handful of clients which contaminate major corporations and even whole sectors of industry. It seems pretty obvious to this reader that Spitzer has only touched the tip of a systemic iceberg and for anyone to orate about the perfect world of competition is wearing blinders.

Note: Does it not amaze you that one Attorney General is doing all this work when the Federal Government with its huge pool of resources is still on the bench? I would add this as a major reason we have this systemic problem.

You also wrote:
Liberals may think the poor too dumb to realize this, but I disagree.

I would refer you to the income tax refund loans (with rates ranging from 70% - 700%) which are aimed at the plight of the poor at people who have no money to do their filing and are forced to accept these exorbitant rates in order to get their taxes done. Of course there are other options available but then the assumption is that that being poor only involves a shortage of cash.

It is the fact that people are poor which makes it so hard for them to take advantage of protections which are complicated and may involve time and an understanding which we take for granted. If you look at the afforded protections you mention, they are just as simple as reading a credit card loan agreement.

Fred Polvere


Thanks Corey for pointing out what I missed. The profits really are relevant in this case. Though I would analyze it a little differently and call it evidence not for lack of competition but for irrationality on the part of the consumer (not considering anything but the intro rate and the like). In either case though it does indicate that concesions to the credit card industry quite likely will not be passed on to the consumer.

Also Prof. Warren offered far more evidence than I can provide that it is just downright silly and dumb to suppose that people act rationally when considering debt. Given this fact it is only reasonable to make them buy debt insurance (i.e. pay higher interest rates to pay for the risk of bancruptcy).

Robert Schwartz

"The main negative comment is that credit card companies have obscene profits and therefore are not being hurt by Chapter 7 bankruptcy which makes it easy to wipe out credit card debt. . . I certainly agree that if interest rates fall, it will not be out of generosity on the part of credit card companies. It will be the result of competitive pressures that compress price when costs fall."

I did not use credit card company profits as an argument and I have no reason to believe that they are above normal. But, I do not think that you or anyone else can show that the CCCs have passed other cost savings, such as the 20+ year decline in money market interest rates, on to their customers in the form of lower rates or fees. I know that they advertise lower rates, but the fact is that those are teasers and will be raised at the slightest excuse such as a late payment. As nearly as I can make out the CCs have used the margin provided by declining costs to increase market share by mass mailings advertising and gimickry. Much of their savings has gone to build loss reserves for ever riskeier customers such as students, not for price reductions for ordinary customers.

There is no reason to believe that the CCCs will be have any differently in the future.

"Some commenters doubt that Chapter 7 bankruptcy harms credit card companies. But if it doesn't, the companies' support for the Bankruptcy Reform Act makes no sense."

While mini-max rationality is the preferred method for analyzing the behavior of the great mass of humanity over a long time, it is useless for analyzing the behavior of individuals or small groups. Why we might ask does socialism remain popular among the wealtiest segments of our country? Envy and resentment power much of human behavior (just read the omments to the original post, I am glad they are not my friends). Why should CCC executives be the only ones who don't get to act on an emotional basis.

"And think: if there were a law that every tenth restaurant customer can leave without paying, would the restaurant industry think the law harmless?"

They would raise their prices by 11%. The credit card companies have priced their product to the level of anticipated defaults and by all accounts they are very good at it. They don't need government help.

"It would be possible to abolish bankruptcy, and thus bankruptcy discharges, without restoring debtors' prisons. The effect of such abolition would be that debtors could be required to pay a modest fraction of their income--indefinitely, rather than just for five years, as under Chapter 13--to pay off the debt."

No, the effect would be that more debtors would skip town and leave their families on welfare. That is the real alternative. Another one would be resorting to violence. Repo man shows up and has head blown off by a 12 gauge. If you make men desparate enough. you can provoke all kinds of stuff you don't want to provoke.

Before this "reform" is repealed we will see some appaling acts of violence and some really ugly suicides. Ask yourself how many dead men you want for lower rates that you are not going to get.

"And, by the way, I do not favor generous exemptions for home or other property of rich people who go broke. I would be happy to see them hung out to dry."

Same to you buddy. Compasion is a much more becoming trait. As long as creditors can ask for security, exemptions do not hurt them in the least.

I wonder how many people who support this proposal condemed the democrats for soak the rich rhetoric about taxes during the 2004 campaign. Why is that rhetoric any better when applied to bankruptcy.

"Some comments point out correctly that the option of bankruptcy, by reducing financial risk, combats risk aversion and encourages entrepreneurship. Fair enough; but individual as distinct from business bankruptcy is only tenuously related to this goal."

In a society that encourages people to go into business for themselves, a number of them will fail and will wind up as individual bankruptcies, not as chapter 11s or other "business bankruptcies" absent some type of inquiry as to the origin and nature of debts there is no way of sorting the sheep from the goats, but the downside of slaughtering sheep is bigger than the joy of killing goats.


I am skepticle of how low credit card interest rates will decrease. I wouldn't be surprised if they fell one or two percentage points, from 19.9 to maybe 17.9% for the highest risk customers, as a direct result of the new law. However, anything lower than that would surprise me. By the way, lower percentage points for "credit card savy" customers is a moot point, because they would never carry a balance in the first place. It seems to me, the people who are really in need of lower rates are the ones who carry big balances, and if someone regularly carries a big balance from month to month, then credit card companies are right to be suspicious of them and charge them high interest rates, (although argueably not right to give them credit cards) because it is obvious that the person does not spend money wisely and is a lot more likely to go bankrupt. There is kind of a catch 22 here. In order to be affected by lower credit card interest, you need to spend money badly, but if you spend money badly, you are going to have a high interest rate no matter what. That being said, I don't necessarily think the new law is a bad idea on the whole.


I can't believe this guy is a judge! He doesn't even understand what it means to be poor. Talk aboout someone out of touch with reality!

Dan Collins

I continually see comments from supporters of this new law that indicate that the poor will still be eligible for Chapter 7 relief because they fall under the means test. What goes unreported is the higher barriers to filing for anyone. Filing fees are increased, as is the amount of paperwork. This will mean higher attorney fees, probably as much as 50% higher. The poor don't have $1500.00 to pay up front. They will also have to pay for "consumer credit counseling," which is the part of the bill that is a pure giveaway.

The new risks for debtor's attorneys, and the new complexity of the law will mean fewer attorneys in the field, and less competition (I am getting out). There is also the prospect of increased litigation over the next decade. The new law will be severely tested all the way up the chain.

A couple of very simple reforms could have done the job. Restrictions on re-filing, and some exemption reform would have hit the mark.


مركز تحميل


thanks for your post.perhaps you will like ed hardy


بنت الزلفي








Thank you, you always get to all new and used it



شات مصر
دردشة مصرية


Hi everyone. It is a profitable thing, if one is wise, to seem foolish.
I am from Tunisia and learning to read in English, give true I wrote the following sentence: "Reviews of the best comforters, including down comforter sets and where to buy for discount prices online."

Waiting for a reply :-), Natividad.




دردشة الشلة

دردشة تعب قلبي


شات الخليج



دردشة برق

دردشة الخليج


thanks to tell me that,i think thats so usefully----
tiffany jewelry
links london

The comments to this entry are closed.

Become a Fan

May 2014

Sun Mon Tue Wed Thu Fri Sat
        1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28 29 30 31