A Quick Thought On The Bankruptcy Bill...

I usually try an avoid wonkishness on this blog, but I haven't heard this line of reasoning on the just-passed bankruptcy bill anywhere else. When banks offer to loan money, whether it is a mortgage or a credit card balance, the interest rate they offer factors in all of their costs: They have to pay interest on the money, they have to make a profit, cover their operating costs and account for some of the money never being re-paid. The interest rates for loans that are currently outstanding are based on the risk associated with bankruptcy law prior to the enactment of the new law. The changes in the law will make it harder for individuals to avoid repayment through bankruptcy. As a result of this, one can expect that banks will make slightly more profit on current outstanding loans, since the rules have shifted in their favor. This would seem to be a classic case of what economists call Rent Seeking. In the long-run all of us who will never declare bankruptcy should gain, because the market rate for loans should fall slightly. Remember, banks have to pad the margins on all loans to make up for the small percentage of dead-beats who fail to re-pay their loans. The new law will make things tougher on those who would escape debt through bankruptcy. I have a hard time feeling sorry for these folks since they are only being made to pay back what they have borrowed. dbp