Obama's campaign has been talking a lot about transparency in mortgage and credit markets going forward. I interviewed Austan Goolsbee today (podcast to come) and his point was that the damage in the mortgage market has been done, but that there's still time to streamline procedures in the credit card market to make them more transparent to consumers. Hillary, on the other hand, is looking for a retroactive bailout: ease bankruptcy procedures to allow people who took out unaffordable mortgages to get out from under their onerous payments.
This is stupid. I reported on the bankruptcy bill for The Economist, and I'm on the record as thinking that it was an unnecessary sop to the credit card companies. It's not that don't I believe that, theoretically, bankruptcy laws might be too generous, leaving creditors no recourse against borrowers engaging in predatory strategic behavior. But in practice, I see no evidence that this is a problem. Before and after the bankruptcy bill, credit has been very easy to get. There was no need to improve access to credit by reliable buyers by tightening the screws on the less credit-worthy. The bill smacked of creditors attempting to retroactively rewrite the terms under which they loaned money, in their own favor. And there is substantial evidence, as I wrote for the Economist, that tightening up bankruptcy laws has a dampening effect on entrepreneurship, and other economically valuable risk-taking behavior.
But altering the bankruptcy laws will help sub-prime borrowers not one whit. Sub-prime borrowers--if they can afford their payment--can still keep their homes right now; bankruptcy lets borrowers cut deals with secured lenders, while shedding their unsecured debt. (This is why unsecured debt carries a much, much higher rate of interest.) There is some talk about allowing judges to unilaterally rewrite the terms of mortgages, but this creates as many problems as it solves: the expansion of housing credit to poor people has been a pretty good idea, and that rule is likely to cut it off.
Short of that, easing bankruptcy will make things slightly easier on people who borrowed too much money. But it will have little effect on the subprime crisis.
Megan,
What was Hillary talking about freezing interest rates? Why do that when rates are falling?
Megan:
Yglesias wrote about foreclosures in The Atlantic, and even included a pretty little map.
He writes: "Many areas of go-go growth—the Southwest, California’s Central Valley, much of Florida, eastern Colorado, Greater Atlanta—have been hard-hit. So too have portions of the Rust Belt, and a narrow east-west strip running from Tennessee into Arkansas."
So what's really happening? How are state lending or foreclosure laws different in Alabama, Mississippi, and Kentucky, to make those states have a much lower foreclosure rate? If it were just MS and AL, I'd believe that they had some kind of stupid populist law which crippled economic growth or prevented poor (black) people getting mortgages, but KY, too?
"to retroactively rewrite...": isn't retrospective legislation unconstitutional? Does the Supreme Court ever defend the actual Constitution these days?
"easing bankruptcy will make things slightly easier on people who borrowed too much money. But it will have little effect on the subprime crisis."
On the whole, you're right. There is a subset that would benefit, though. Sub-prime borrowers with ARMS who have heavily tapped credit cards to meet the unexpectedly high expenses. Some of these might be able to declare bankruptcy and make their mortgage payments. Each forclosure that is avoided does a small part in keepng prices from dropping, but I doubt there are enough people in this situation where saving their homes is meaningful in this regard.
'"to retroactively rewrite...": isn't retrospective legislation unconstitutional? Does the Supreme Court ever defend the actual Constitution these days?'-Posted by dearieme
That has been declared by the SCOTUS to apply to punitive laws. The line seems pretty simple "No bill of attainder or ex post facto Law shall be passed.", but just as the meaning of a law is sometimes derived from congressional records of debate of the law, what that quoted line means can be influenced by the existing record of the framers debates about the constitution.
If there exists official minutes of the Constitutional convention where someone brought up the British tendency to pass ex post facto criminal laws so they would have an excuse to round up American patriots, the SC might have decided that's all the founders wanted to prevent.
A strict reading of the line would essentially eliminate the concept of amnesty. If that were the case, an amendment mollifying that would have been passed in 1865 so that we would not have had to execute the majority of the Confederacy.
Changing the bankruptcy law is not generally an "ex post facto" law, even if it has ex post effects. Creditors write contract terms, particularly the loan rate, based on existing market conditions. The existing bankruptcy law, including the way judges interpret it, is part of those market conditions. Changing the law changes those market conditions, in ways which might benefit one or the other party to the contract. But unless the law says "bankruptcies filed before (some date in the past) are to be resolved under the new law", it's not an ex post facto law.
Same with the tax code: Legislating on December 31 that income for the previous year is to be taxed in a different manner does not create an ex post facto law - the law is "In 2008, by April 15, you owe us this much on money you earned in 2007." Had you known what the change would be, you might have arranged your affairs differently, but it's not an ex post facto law.
Sucks, but that's the way it is.