Bankruptcy Reform Makes Housing Slump Worse
Even though I’m paying my bills I opposed the bankruptcy reform pushed through congress in 2005. As I wrote in March 2005,
And who are those in real need? Why the banks of course, most of which have offices in Delaware and give handsomely to both Democrat and Republican parties, including Senators Carper and Biden.According to Consumers Union, which bitterly opposed the bill, Congress is set to protect the banks and those running them. For example, modest income debtors face harsh new barriers. Weighed down by unexpected medical bills or the loss of a job? Too bad. The banks need your house and ar more than you.
Now it appears that this supposed “reform” has made the housing slump worse less than two years after it was enacted.
But today’s growing problem in the housing market is different—foreclosures are soaring, while bankruptcies, though clearly on the upswing, are running roughly at half the 2001-2003 pace. The reason: A new bankruptcy law, approved by Congress in 2005 after years of debate, makes it much harder for households to get out from under their consumer debt. The result: More people being forced to walk away from their homes, leaving lenders holding the bag. Perversely, a law intended to help the financial industry may be damaging the housing sector, creditors and borrowers alike. “It doesn’t matter what you think of the purpose of the new bankruptcy law. The timing is bad,” says Susan M. Wachter, professor of real estate at the Wharton School of Business.
So let’s review. In order to get more money out of debtors, lenders pushed through a bankruptcy bill that in extreme cases gave them their debtors homes. Now debtors are unable to pay their credit card bills AND their mortgages, so they default on both. The banks get their debtors homes – which stand empty and depreciate on their books.
No I am not anti-banking at all. Living in Delaware I’ve worked at most of the big ones and recognize the need banks fulfill in the global economy. However being an amateur historian, I tend to remember things – like bubbles – and I even wrote the following in Sept 2005 about the current one.
The Past is real and to a great degree concrete. We lived it and know it – well, at least our faulty perception convinces us that we do. The Future, on the other hand, is as ethereal as a cloud.Plus, we also take comfort in the Herd: “Everyone else is doing it. Can everyone else be similarly deluded?”
Well, yes they can. Buying Global Crossing at $200/share. Selling homes to buy a single Tulip bulb. History is peppered throughout with mass delusion of one type or another.
In addition, there are always Doom Sayers. “The End is Nigh”, “The bubble will collapse”, “Doom, Doom, Doom.” Most of the time these people are wrong and can be safely ignored. However when do you start listening to them?
Perhaps you never should – since broken clocks may be right twice a day but we don’t use them to tell time. More useful are predicators that have been tested by time and have worked in the past. All of these indicators point to a housing bubble – one that exists on a global scale.
Broken clocks may be right twice a day but we don’t use them to tell time... That’s a good, original line.
The banks bought the politicians and the pols gave them what they wanted. However it turns out what they wanted wasn’t good for them in the long run. Now they are bleeding cash, and the heads of banking CEOs are beginning to roll.
But I’m not feeling all that good about successfully predicting the future 2 years ago. Being an historian I remember that most recessions and even the Great Depression started with unhealthy banks.
11/08/07 UPDATE:
Bloomberg chimes in with a similar article:
``Be careful what you wish for,’’ Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said. ``They wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.’’
Cry me a river…
Ron Coleman:
Yeah, something about “unintended consequences”?
11 November 2007, 7:43 pm