Day: 2011/10/24

Quick Links on Student Loan Bankruptcy Reform

There are two.

(1) Reuters, “Obama to announce help on housing, student loans,” in The Raw Story

Don’t bother clicking on the link. All it says is, “In Denver on Wednesday, he will announce a student loan initiative.” If I know my B. H. Obama, I predict the proposal will be underwhelming.

(2) Karina Frayter, “Bankruptcy Law Change Could Help Consumers Recover: Experts,” in CNBC

Looks like people are considering this as an option.

Dean Baker, co-director of the Center for Economic and Policy Research, agrees and says: “People can overplay the importance of debt relief, but it would certainly help if people could get out from under their burdens.”

Go Dean Baker.

But Joshua Shapiro, chief economist at MFR, doesn’t like the idea.

“In the longer-term it would diminish the availability of credit, as lenders balk at extending credit to borrowers who have easy means of shirking their debts,” says Shapiro.

Julia Coronado, chief economist for North America at BNP Paribas, agrees and says it punishes those who were prudent. “They may also be having hard times because of the tough job market but would not receive any assistance as they never took on debt they couldn’t afford.”

These two miss the point. (1) Extremely few people file bankruptcy capriciously. People are honest and want to pay their debts so long as they have the income to do so. (2) Bankruptcy isn’t a free lunch. It appears on your credit report, and you can’t file for again seven years after discharge. “Those who were prudent” do not lose out. They get the benefit of an economy in which people have more disposable income, which means jobs for them, raises, etc.

Some economists go even further and call for a “Debt Jubilee” to forgive excess mortgage, student loans and credit card debt for some borrowers.

Prominent economist Stephen Roach, who is also a non-executive chairman at Morgan Stanley Asia, is one of them.

“The American consumer is going nowhere,” Roach said in an August appearance on CNBC. “If we don’t address that, all the public policy aimed at the fiscal and monetary stimuli are going to be pushing on a string.”

I think this is the first economist of any stripe I know of who’s advocated debt forgiveness.

“Making existing contract invalid is not conducive to a healthy economy,” says [JPMorgan Chase chief US economist Michael] Feroli.

The right to contract is worthless without fair enforcement. The enforcer is going to be the government, and it’s going to want concessions from the parties, like protecting citizens from predatory lenders and allowing them to become debt-slaves. This means that lenders will have to take on the risk that people won’t repay their loans. If that’s a problem, charge a higher interest rate or lend to someone else. This is why “credit” is related to “credibility.” Those who have money will lend it to the most trustworthy people, and stripping bankruptcy protections makes all debtors equally trustworthy. Not how the system is supposed to work, unless you’re a communist, or a kleptocrat.