According to BusinessWeek (registration required), some banks now make over 75% of their money from hidden fees on their customers -- account
closing fees, customer service fees, and many more. All in all, these service fees raked in $32 billion for the banks in 2004.

That means each American family spends almost $300 on surprise fees every year, on average. Many pay nothing, of course, but that also means that millions pay even more.

"Protection" fees (super short-term loans to cover checks before they bounce) are some of the biggest and the worst. Banks let you choose at the time if you want to pay $1 and use another bank's ATM. But the bank never told college student Chris Keeley that his $230 worth of Christmas presents would cost him $447.

That's because the $217 in (unrequested) "overdraft protection" never showed up on his receipt -- until the bill appeared right after Christmas. Only after the gifts were unwrapped did Chris's bank let him know he had accidentally taken out a "loan" at 1130% annual interest.

Banks used to profit when they lent responsibly and kept deposits safe. Now they profit by springing fees on depositors that put their savings at risk.

Some people will say, Chris should have read the fine print. Sure. (I'm a lawyer-to-be, what else can I say?) But his real mistake was much bigger. He trusted his bank, assuming they wouldn’t gouge him the minute they got the chance. Nowadays, that’s a high-cost assumption.

What’s good for GM is good for America, but what’s good for regular citizens isn’t?

As Robert Reich points out in American Prospect, there’s a double standard in bankruptcy law. While the recent bankruptcy bill makes it harder for regular citizens to declare bankruptcy, corporate bankruptcy law continues to allow large businesses to operate while sloughing off their obligations to employees and shareholders.

Corporations can declare bankruptcy and gain protection from creditors whether the underlying reason was a genuine catastrophe or sheer mismanagement. Under the new law, even consumers who face crushing debts because of genuine uncontrollable catastrophe (like a medical emergency) are denied the benefits of brankruptcy.

In the first quarter of this year, consumer spending represented 71% of TOTAL US economic output (GDP). Individual citizens drive the US economy, and what’s good for consumers IS good for America. Citizens who face severe financial constraints because they have a medical catastrophe should have at least the same breathing room offered to corporations.

Individual citizens should be entitled to the same protections as large corporations.

James Weingarten is a new member of the team and fellow law student. A formal introduction to the newest members of our blog team is forthcoming. -MN

Time Magazine's take (payment required) on the bankruptcy problem:

Once upon a time, when both morals and money were harder, bankruptcy was bad. Wastrels used to be bailed out by their better-off relations in order to save the family name from the stigma. But in these days of looking-glass economics, bankruptcy is growing more and more fashionable as a way to settle one's debts and land some more credit.

The story, "Making Bankruptcy Pay," appeared on February 22. The year: 1963.

Bankruptcy opponents have been recycling this "once upon a time" line for the past 42 years (and then some). But it looks like our morals still had a long way to fall since '63. Check out law professor Todd Zywicki's Congressional testimony in February of 2005:

Regrettably, the personal shame and social stigma that once restrained opportunistic bankruptcy filings has declined substantially in recent years.

They can't both be right, can they? Maybe values repeatedly drop, then sermons like Time's and Todd's repeatedly restore them. That would mean morals were in a tail spin through the '50s, and hit rock bottom by early '63 -- just ahead of the Beatles' socially corrosive hit "I Want To Hold Your Hand."

Or maybe morals have been in decline since the stone age. Consider this Congressional testimony:

Dishonest people make it a practice to go into debt to these merchants for the necessaries of life and then seek the bankruptcy courts to get relief from the payment of such debts. We ought to go back to the old-fashioned primitive doctrine that requires the payment of all honest debts. . . . Let us go back to honest and fundamental principles.

Yes, as this 1910 Congressman nicely observed, recent moral downturns must be to blame for all these opportunistic bankruptcies. We would all be better off if we returned to a primitive age of honest and fundamental principles.

Now, if you'll excuse me, I have to finish my hunting and gathering.

[thanks to David A. Moss, Gibbs A. Johnson, The Rise of Consumer Bankruptcy: Evolution, Revolution, or Both?]

Jon Lackow is a new member of the team and fellow law student. A formal introduction to the newest members of our blog team is forthcoming. -MN

President Bush at the bankruptcy bill signing ceremony:

Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts.

The President's comment is simply not true. Let me count just some of the ways:

1) Under current law, everyone pays back taxes, child support, alimony and student loans, and if they want to keep the house or the car, they have to pay those loans too. This bill expands the list of non-dischargeable debts for EVERYONE, regardless of income, and it expands the amounts that they have to pay for cars and other assets. To say that people leave bankruptcy and "don't have to pay back their debts" is just plain wrong.

2) The means test will require EVERYONE who files bankruptcy--regardless of income--to file new forms, detailed budgets, tax returns and new affidavits. If the person cannot afford the higher lawyers' fees to manage this new work or if the person trips over one of the requirements, then she is tossed out of bankruptcy--regardless of whether she is above or below median income. In some places, the means test bites above-median and below-median debtors differently, but it bites everyone.

3) The dozens and dozens of other provisions in the bill that are aimed at consumers have no income test. They apply to everyone, regardless of income.

4) The millionaires’ loopholes remain open. To say that those with above-median income will pay something is true only for the common folk. The millionaires can still slide through.

This bill has always suffered from a truth-in-advertising problem. The proponents say the bill does one thing, while the reality is very different. Evidently that problem persists even as the President describes what he is signing.

A bankruptcy-related poll at MSNBC asks: “Will new bankruptcy laws curb Americans' spending habits?” The choices are (1) Yes, it's a good deterrent and will rein in reckless spenders and (2) No, spendthrifts will overspend no matter what the law says.

What's the correct answer? Neither. The poll is predicated on the hackneyed premise that the average American bankruptcy filer is a spendthrift whose unchecked pursuit of luxury goods is the root cause of her bankruptcy. If that were true, bankruptcy reform would be easy. But it isn’t true. The research has been overwhelming. About 90% of those who file for bankruptcy do so after a job loss, a serious medical problem or a family break up. How about a poll on that?

• “Will the new bankruptcy laws help Americans keep their jobs?”
• “Will a change in bankruptcy law cause more people to stay away from the emergency room when they feel chest pains?”
• “Will the new bankruptcy laws cause more husbands and wives to stay together - or, better yet, cause fewer spouses to die?”

Part of the reason the fight against this bill has been an uphill battle is the widespread but false presumption that Americans go bankrupt because they purchase bigger televisions, bigger cars and bigger homes. Even though that assertion bears no relationship to the empirical evidence, the bill’s proponents asserted it as if it were unquestioned truth - and some of the media parroted the view, no questions asked (see the poll).

Whether you identify as a progressive, a moderate or a (compassionate?) conservative, it’s important to get the facts right. The fact is that for every hypothetical spendthrift or abuser the new law reigns in, it will adversely impact scores of real, hard-working, middle class folks who are down on their luck and desperate to get on with their lives.

President Bush signed the bankruptcy bill this afternoon. More to come soon...

The House passed the bankruptcy bill, and now we’re down to the last minutes before President Bush signs it into law.

I should be depressed, but I’m not.

Eight years ago the proponents said it was a speeding train that could not be stopped. It was written by a lobbyist and shopped to a friendly Congressman. The financial services industry was giving big money, and there was no one in the way to stop it. We slowed it down. In the meantime, more than 12 million families got some relief when they were overwhelmed with debts following job losses, illnesses, or family break ups. With all the money on just one side in the debate, that’s pretty amazing. Even now, the bill that came from the Senate to the House had a few small adjustments that will help keep the door open for more families in desperate trouble. Not bad.

But the part that makes me feel better is that this time around we finally got the message out. Even after the horse race was over and it was clear the bill would pass, the press continued to write about the bankruptcy bill—and the stories weren’t pretty. The politicians who thought this would be a free vote discovered they were wrong. The middle class is beginning to rumble, and those rumbles will change things.

I’m also glad to see the old conservative-liberal dichotomy break down over bankruptcy. Both conservative and liberal bloggers exposed the rotten foundations of this bill, particularly the imperfect credit markets and the influence of money on politics. Could alliances shift over economic issues aimed at middle class families?

Finally, it ain’t over. The rumors are already all over Washington that a “technical amendments” bill will be passed during the 180 days before the bankruptcy law becomes effective. Several new stand-alone bankruptcy amendments are already in the hopper in the Senate and House, including a bill to sew up the millionaires’ loophole and a bill to stop corporate forum shopping in bankruptcy.

And it ain’t over in a bigger sense either. The point of this whole conversation is that bankruptcy isn’t an isolated issue. Bankruptcy is about job losses and health care finance; it is about credit card practices and predatory lending. Bankruptcy is just one way to measure the financial health of the middle class.

Josh has asked us to hang around, and particularly to continue talking about the shifting economic scene for the middle class. We think maybe there will be something to blog about even after the President has signed the bill.

The Economist has a fairly balanced treatment of American bankruptcy reform. It's worth reading.

Interesting passage:

Making bankruptcy more difficult has other, less attractive economic effects. Forced repayment plans can discourage people from working harder (or at all), since extra income simply goes to pay creditors. Making bankruptcy more unpleasant can also deter entrepreneurship; people starting businesses are often required to personally guarantee loans to their firm—and those without assets are often forced to rely on MasterCard and Visa for their seed capital.

Thanks Sameer.

Click here for a great, sortable database on yesterday's House vote on S.256.

Play around with it; if you come up with anything interesting or noteworthy, let us know.

Thanks to Techpolitics and reader KC.

The bankruptcy bill has passed the House 302 to 126. 73 Democrats voted for it. See the final vote roll here.

We expect President Bush to sign the bill tomorrow. It becomes law 180 days afterwards.

Guest Blogger: John Edwards

This morning Elizabeth Warren and her students invited me to say a few words about the bankruptcy reform bill. I'm grateful for the opportunity.

I'm now spending a lot of my time tackling the challenges of poverty, but I learned a lot about bankruptcy on the campaign trail last year. I saw how many good families end up broke and poor, and
how they need the safety net of a fair bankruptcy law if they're going to get back on their feet.

Like a lot of Democrats, I voted for a bankruptcy reform bill before. I can't say it more simply than this: I was wrong.

The bill is supposed to crack down on irresponsible borrowers. That's the right thing to do. The problem is that this bill imposes big burdens on families who did everything right but went broke just because they lost a job or lost their health insurance. And, even
more than the legislation I supported, this bill doesn't crack down on the real abusers.

Two million Americans go bankrupt every year, but you might never know it. People keep it to themselves. They're ashamed about what has happened to them. But they aren't alone-these families are our neighbors, our brothers, our friends. And I've listened to so
many people tell me how their life was on track until hardship hit. Thanks to Professor Warren, we now know that half of families going broke suffered illnesses or high medical costs.

These men and women want to pay their own way, but they can't. They can't because the hospital wants $135,000 to cover the heart operation and the plant just cut back their hours. They can't because the bank is about to foreclose on a predatory loan unless
they can pay $40,000 in 48 hours. They can't because they lost their job and now the electric company wants a few hundred dollars more just to turn on the lights.

This bill won't do anything to give struggling families more security. It will only make it harder for good and decent people to start over. The new means test that will mean hundreds of dollars in new legal fees for families who barely have money to put
food on the table.

If we want real reform, we shouldn't punish every hard-working family looking for another chance. But we should get serious about the biggest abuses.

In some states, a multimillionaire CEO can drive his company into the ground, declare bankruptcy, and still keep his mansion-tennis court, Jacuzzi, and all. The 2001 bill at least stopped that by capping the "homestead exemption" at $125,000. This bill will
allow many multimillionaires to protect their mansions if they plan ahead.

We've also seen the credit card companies and predatory lenders become more aggressive. Today, many Americans have seen their interest rates triple to 29% or higher-not because they missed a payment, but just because they lost a job and needed another loan. Many more Americans are losing their homes because lenders
have hidden points and fees in their loans. These companies are making billions by kicking people when they're down. This bill does nothing to stop them.

Unfortunately, we know what the outcome today is going to be. But that doesn't mean we should give up the fight-it means we have to fight harder. If we want to stop bankruptcies, we need to address their real causes, like rising health costs. We need to stop the
abuses by the credit card companies and the predatory lenders. We need to make sure all families, and especially those who are poor, can build their savings and assets so they have some security if something goes wrong. It won't be easy, but it can be done.
That's what being American is about--standing with people who are struggling to do right, and taking on anyone who tries to take advantage of them.

If you want to learn more about the work I'm doing, I hope you'll check out my webpage.

Check out this story about the impact of the bankruptcy bill on New York City, where salaries are dropping and prices are rising.

The House does the Senate's bidding. We're hearing from sources on the Hill that tomorrow's House debate on S.256 will be 30 minutes long. Apparently that's how long it takes for the House to pass on the fates of hundreds of thousands of hard-working, underserved American families.

Even if one somehow believes that the bill has merit, it clearly isn't so deserving that 30 minutes will suffice. The truth is that the bill is so bad that the House leadership wants to shove it down Americans' throats as rapidly and with as little debate as possible. It's fundamentally anti-democratic.

MoveOn gets involved. MoveOn.org just sent out the following action alert concerning the bankruptcy legislation:

Dear MoveOn member,

A great majority of the families that declared bankruptcy last year did so because of a major life crisis—huge medical bills or layoffs—that threw them into a spiral of debt. Now, after a multi-year, multi-million dollar lobbying effort by credit card companies, Congress is poised Wednesday to approve a sweeping change in bankruptcy law that would make it impossible for folks who have been dealt a bad hand to get a clean start. The law actually gives credit card companies new ways to seize your home and car if you get into financial trouble.

After accepting more than $620,000 from the lending industry to his various PACs, Republican Majority Leader Rep. Tom DeLay has scheduled the vote for Wednesday. The change in bankruptcy laws is a clear example of whose interests the Republicans in Congress are serving. But, in a betrayal of middle class families, as many as 90 Democrats may also vote the wrong way. Both Republicans and Democrats need to know that millions of us oppose this bonanza for corporate contributors that hurts families who are the victims of circumstances beyond their control.

We need to show Congress that we're watching. Today we're asking you to make a pledge to contribute for radio ads in the hometowns of representatives, both Republicans and Democrats, who vote wrong on this bill. We'll announce the amount of the pledge fund TOMORROW, before the vote on Wednesday, so that members of Congress know there are consequences for their votes.

Please click here to check out the script of the radio ad and make your pledge today.

By making a pledge now, we can show representatives who are on the fence that there are serious consequences for hurting Americans in order to help the nation's credit card companies. The radio ads will play an important deterrent to future corporate grabs—the text reveals how much the member of Congress received from the lending industry and how the bill hurts middle class families.

What's wrong with the bankruptcy legislation? A lot. More than 1.5 million families had to declare bankruptcy last year—half because of unexpected and extraordinary medical expenses. Millions more totter on the edge of bankruptcy. The large numbers of bankruptcies is a clear sign about the tenuous state of the economy—millions of Americans who work hard and play by the rules could be pushed at any time to financial ruin by job loss, business failure or major medical expenses. The pressure valve for these families has historically been bankruptcy but now Congress is making things tougher for these hard-working folks in order to secure billions in profits for creditors.

The legislation Congress will vote on is more than 500 pages long, all in highly technical language. But the Republican leadership and corporate lobbyists are in such a rush to push it through that the text is full of misspellings and repeated phrases. Representatives might not even be allowed to make amendments. But the overall thrust is pretty clear:

* Make families pay more to creditors, both in bankruptcy and after bankruptcy, so that instead of offering a clean start, a bankruptcy filing will leave families burdened by credit card debt, car loans, and continued payments to banks or to payday lenders.

* Make it more expensive to file for bankruptcy by driving up fees so that the people in the most trouble can't afford to file.

* Make it trickier to get through a bankruptcy so that more people will get pushed out of bankruptcy with no debt relief.

* Make it harder to repay debts by increasing the minimum payments in repayment plans.

* Preserve at all costs the millionaires' loopholes—special privileges that allow the super-rich to escape their debts by hiding their money in special exemptions and trusts.

Banking and credit card companies have fought for such legislation since 1997 but repeatedly failed to win congressional approval. Like pigs at the trough, the banks and credit card companies are feasting now that the Bush administration has a second term. This legislation has sailed through Congress this year with only a whiff of opposition.

That isn't surprising: According to the Center for Responsive Politics, MBNA, Credit Suisse First Boston, Bank of America and Wachovia were among the top contributors to Bush's two campaigns in 2000 and 2004, giving more than $300,000 in total donations. MBNA also was one of the top contributors to Republican candidates and committees in the 2004 elections with some $7.3 million in political donations. And now they're poised to reap rewards from their investment.

Huge corporate bankruptcies, like Enron and WorldCom, have cost thousands of people their jobs. But instead of addressing corporations run amok, Congress is helping these companies run rough-shod over Americans.

Congress needs to know that a vote for this bill will be an embarrassing vote siding with credit card companies over America's families. Please click here to make your pledge.

The changes in bankruptcy laws are just the start. This week the radical Republican leadership, like Rep. Tom DeLay, have declared a war on ordinary Americans with a corporate trifecta: bankruptcy law changes, a permanent repeal of the estate tax (which only affects the super-rich), and a budget that cuts health care and explodes the debt.

Ultimately, we need to change who runs Congress to stop the assault on America's middle class. Every action we take now is one step in that direction. Please act today.

Conservative commentator Debra J. Saunders slams the bankruptcy bill:

When Washington pushes for more responsibility among debtors, but not loan-shark-like lenders, when its "ownership society" principles don't make big corporations own up to their role in the bankruptcy problem, the GOP is toadying to big business.

Why do debtors have to bear the burden of creditors' bad business practices? Because they don't bankroll elections.

One of the least discussed changes in the new bankruptcy bill is the credit counseling provision. It may also be one of the most despicable. The new bill will require debtors to learn more about handling credit before they declare bankruptcy. Sounds great, right? Wrong.

What are credit counseling agencies?

Legitimate credit counseling agencies are (usually) non-profits providing valuable services to debtors. They offer education and financial guidance to help debtors get control of their debts. Some agencies also offer “debt repair plans.” Under these plans, the debtor pays the agency a fee, and the agency works to reduce the debtor’s monthly payments or overall debt (by negotiating reduced interest rates with creditors, consolidating debts, etc.).

Ideally, everyone wins: the debtor avoids bankruptcy; the creditor gets paid more than if the debts had been discharged in bankruptcy; and the creditor pays the agency enough of the debtor’s recovered payments to cover the agency’s costs.

The counseling industry boomed when bankruptcies skyrocketed. About nine million Americans contact these agencies each year; about 2 million people are in debt repair programs.

Big bad wolves

Here comes the bad news. Too often, credit counseling agencies are scams. According to a 2004 Senate subcommittee investigation, many pose as non-profits in order to fleece consumers:

Debtors seeking help receive little or no counseling. And millions of dollars that debtors pay in fees end up going toward executive salaries or are funneled to for-profit affiliates.

Several of the worst abusers were ultimately sued by the government. Just last month, they settled the suit for $6 million.

Meanwhile, the IRS is cracking down on other abuses:

The Internal Revenue Service has also been investigating nonprofit credit-counseling firms to see whether they are misusing their tax-exempt status. The tax agency is auditing 48 credit-counseling agencies -- accounting for about half of the industry's assets -- and has notified several firms that it intends to revoke their tax-exempt status.

Many credit counseling agencies are actually set up by the creditors. The credit card companies pay the fees, and that means they call the tune. Some agencies instruct their counselors to tell clients to pay the credit card companies, even if it means not paying the mortgage or the rent. Others forbid them from telling clients that bankruptcy might help them.

There are undoubtedly some very good credit counseling agencies out there. Unfortunately, they don’t carry any special sign to show that they are on the up and up. The bankruptcy bill will herd millions of families into the outstretched arms of companies that have no intention of helping them manage their money better.

All of which leads to some disturbing questions.

If the industry is so rife with abuse and bad faith, why are supporters of “reform” so eager to push more Americans into it?

Why does the bill require credit counseling for people who get sick, lose their jobs, or get called up to Iraq? Do reformers really think these unfortunate souls go broke for a lack of financial “education”?

And finally, is this new provision really about education? Or is it about giving creditors one last chance to pick debtors’ bones clean before they enter bankruptcy?

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.