Chloe Cockburn has a great post about bankruptcy reform at ACSBlog.

The Daily DeLay blogs on the compromised Majority Leader and his bankruptcy bill here.

House Majority Leader Tom DeLay's (R-TX) iron fist tenure as the majordomo of the Republican agenda in Congress has attracted scrutiny for its shocking combination of conflicts of interest, questionable ethics, and arrogance of power. He revealed his darker side in the aftermath of the Terri Shiavo controversy with his thinly veiled threats against the judiciary, which helped further weaken his support back in Texas (here and here). DeLay's strong-arm tactics and loose ethics have even angered some in his own camp (for good measure, here too). Turns out, unsurprisingly, that DeLay's kingdom of corruption extends to the bankruptcy bill that must now pass through the House before reaching the president's desk.

A new report from the Public Campaign Action Fund highlights the love-love relationship between DeLay and the banking and credit card industries. DeLay ranked 15th amongst his House colleagues in contributions from the lending industry with $337,000; when contributions to his leadership PAC, ARMPAC, is factored in, the total nearly doubles to $620,000. His drive to pass the bill quickly could be explained by the 76% increase in contributions he's received from credit and banking industries since the previous election cycle in 2002. The Majority Leader's full-throated support of the anti-consumer bankruptcy bill, and his eagerness to pass it as quickly as possible without adjustment, is strengthened nightly by pillow talk with his friends in the lending industries.

As a whole, of the 15 top recipients of banking/credit industry money, 80% flowed into the coffers of GOP House members. This steady flow of funds helped vault the bankruptcy bill to the top of the agenda for this Congress, and explains why the GOP leadership in both houses have proven unwilling to consider any amendments to a bill drafted by the credit and banking lobby 8 years ago.

The bankruptcy bill bears the imprint of a DeLay operation: it is creditor-written, well-funded, and stinks to high heaven of DeLay's K street connections. There should be no doubt that this is Tom DeLay's bill, and the 8 year struggle for its passage is part of a larger narrative of a burgeoning government-for-hire that has personified DeLay's tenure as jefe of the Republicans in Congress. If the spirit moves you, more information on taking action on the DeLay's bankruptcy bill can be found here.

Are the Democrats giving up? We’re hearing that Rep. Steny Hoyer (D-MD), the House Minority Whip, won’t be whipping against the bankruptcy bill when it comes to the House floor. That isn’t surprising. Hoyer twice voted for previous iterations of the bill and receives more money from the finance sector than any other industry. He’s also a frequent ally of and financial contributor to the House Blue Dogs – the conservative Democrats who publicly expressed their support of the bill to Speaker Hastert.

Though this may not be a surprise, it’s still an outrage. Hoyer is the second-ranking Democrat in the House and a key member of the party leadership. If he fails to whip against this bill, he will shirk his responsibility to the Democratic members that elected him Whip, to the 42,000 Marylanders who live in medically-bankrupt families and the hard-working families who form the heart of the Democratic party.

This issue belongs to progressives everywhere. Too many Senate Democrats showed that they were willing to vote against a basic homestead exemption for seniors, to vote against protection for military families targeted by predatory lenders, and to vote against families brought down by illness and accidents. They showed they were willing to vote against closing the millionaires' loopholes and to vote against waiving conflicts of interest rules for investment bankers who should be investigating the next generation of Enrons and Worldcoms. Why should progressives give up these issues? Why should they let Democrats hide behind so-called "bipartisan support" for squeezing working families while protecting fat cats?

Don’t let Representative Hoyer get away with it. Write to him and urge him to whip against the bankruptcy bill. While you’re at it, write to Representative Pelosi (D-CA), the Democratic House Leader, and urge her to ensure that the Democratic leadership is united and active against the bill. Whether or not its passage is a foregone conclusion, we cannot and should not let our elected representatives neglect their responsibilities to their constituents and to progressives across the country.

Judge Richard Posner and economist Gary Becker have joined the ranks of academic bloggers that have turned their considerable intellects to the topic of bankruptcy reform. I expected a real treat, but their recent comments on the pending bankruptcy bill are so out of touch (and out of date) that I was amazed to see them advanced. Posner and Becker’s entire discussion rests on the standard chestnut that the bankruptcy bill will benefit consumers because it will reduce creditors’ risk and therefore cut interest rates. That argument not only ignores twenty years of data; it also perpetuates a plodding “perfect markets” model of consumer credit that most theorists have long since abandoned.

Start with a brief look at the data. Bankruptcy write offs represent about half of the total bad debt writes, which would suggest that they ranged from 1% in 1985 to 2.5% in 1992. Much larger is the cost of funds, which is the amount companies must pay to borrow the money they lend out. From 1980 to 1992, that cost fell from 13.4% to 3.5%, a stunning decrease in costs. What happened to the interest rates the companies charged? In the same time period, the average credit card interest rate rose from 17.3% to 17.8%. Move the clock forward a bit. When the cost of funds dropped nine times in 2001, instead of passing along the cost savings, the credit card companies pocketed a windfall of $10 billion in a single year. So much for the idea that the credit card companies are lined up to pass savings along to the customers.

Posner and Becker imagine a credit card market that simply does not exist. A WSJ piece by Mitchell Pacelle described a changing market:

Until the early 1990s, most banks offered one main credit-card product. It typically carried an annual interest rate of about 18 percent and an annual fee of $25. Cardholders who paid late or strayed over their credit limit were charged modest fees. Profits from good customers covered losses from those who defaulted.

Then card issuers, in an effort to grab market share, began scrapping annual fees and vying to offer the lowest annual interest rates. They junked simple pricing models in favor of complex ones they say were tailored to cardholders' risk and behavior.

According to the WSJ, a typical credit card contract was “little more than a page 20 years ago [but runs] to 30 pages or more of small print today.” Universal default, undisclosed penalty rates, arbitration clauses, undisclosed amortization rates—the combination of complex language and missing terms makes the contracts indecipherable even for those who have secret decoder rings. The credit card companies have fought like tigers to avoid telling customers the basics—if you make the minimum monthly payment, you’ll pay $xx in interest and it will take you xx years to pay it off. This non-closure is so that credit card companies can compete to lower fees?

A number of younger economists have explored credit card pricing, developing a much more nuanced theory of how it exploits lack of consumer information and systematic cognitive errors. Oren Bar-Gill penned a detailed analysis of how credit card companies use dozens of tricks in their contracts to encourage customers to underestimate costs and overestimate their repayment schedules. He shows that even in a competitive market, these pracrices can lead to welfare losses. Lawrence Ausubel has demonstrated that, while people will shop for introductory interest rates, they are far less likely to re-shop when new fees and penalty rates are imposed on them. A recent article in the Quarterly Journal of Economics by Stefan Della Vigna and Ulrike Malmendier examines pricing strategies in various consumer markets and concludes, “for all types of goods firms introduce switching costs and charge back-loaded fees. The contractual design targets consumer misperception of future consumption and underestimation of the renewal probability. The predictions of the theory match the empirical contract design in the credit card, gambling, health club, life insurance, mail order, mobile phone, and vacation time-sharing industries.” The lesson is clear: credit card companies can maximize profits by pricing introductory rates competitively and then hitting customers hard later on with fees and penalties. And that model certainly seems to fit the data on revenues. Today, credit card fees and late charges amount to $50 billion—about half of all credit card revenues.

If Posner and Becker wanted to put their simple model to good use describing a perfect market, then why didn’t they question why the proposed changes in the bankruptcy laws would apply to all outstanding debt? Existing credit card debt was priced based on current laws. Billions of dollars are outstanding in fixed-term loans. The bankruptcy bill would change the terms of those loans by limiting the availability of the bankruptcy discharge—a nice windfall for the creditors who face lower risks. If the law isn’t designed to be a give-away to the creditors, why not make the new rules applicable only to loans made after the effective date of any amendments—-when those new, low Posner-Becker interest rates will be in effect?

The credit card companies didn’t spend tens of millions of dollars for campaign contributions and high-dollar lobbyists so that they could pass legislation to save money for their customers. They paid for a law that will let them squeeze ordinary working folks harder. They want a law that will maximize profits from their richest source—those who stumble. And if that law put more people directly in the line of file when they lose their jobs or get sick or get called up to military duty, that’s just the way it works when the companies have the power to write the laws. The credit card companies want a law that will give people caught in 35.99% hell no chance to escape, no matter what.

Posner and Becker talk at length about debtors’ willingness to incur credit, but nothing in the bankruptcy bill distinguishes credit issued for a fabulous vacation and credit issued to cover hospital bills or put food on the table during a long spell of unemployment. It is all treated the same, which undercuts the Posner-Becker notion that consumers have their fate in their own hands every time they sign a credit slip. Europeans have universal health insurance, better unemployment protection, and tougher bankruptcy laws; to make the bankruptcy laws in the U.S. tougher when shrinking health insurance coverage and growing unemployment and outsourcing tear away at middle class families is simply to ignore facts that don’t fit the model.

I know that it is fun to think of every market in terms of simple “if I had a nickel and you had a banana” models, but when Congress is on the verge of passing a massive give-away to credit card companies, a little more realism seems called for.