The Bankruptcy Reform Act--Posner's Response to Comments
These were excellent comments as usual--many negative, but that's fine.
A few brief countercomments:
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. It is very difficult to determine whether an industry's profitability is in excess of competitive levels, which is why economists frequently fall back on market-structure indicators--all of which suggest that the credit card business is highly competitive and profits therefore probably normal. But we needn't rest on conjecture. The nice thing about a new law, from the analytical standpoint, is that it should enable persuasive hypothesis testing. Critics contend that the new law will not reduce interest rates; we shall see. (But it should be noted that, from an economic standpoint, if costs fall, a monopolistic industry, like a competitive one, will reduce price; the profit-maximizing price will be lower as a result of the reduction in costs.)
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.
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. And think: if there were a law that every tenth restaurant customer can leave without paying, would the restaurant industry think the law harmless?
One comment suggests that the logic of my position is to restore debgtors' prisons! Actually, lenders would not favor such restoration, because it would make people afraid to borrow. 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.
Much concern is expressed about the impact of the Act on the poor. But the poor will remain fully eligible for Chapter 7. 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. In this connection, while relating the new Act to a general ideology of encouraging financial self-reliance by people of modest means, I did not mean to suggest (as one commenter thought) that it is ideology that drove the reform. I assume politics drove it. 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.
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.