The personal bankruptcy rate could be twice as high if not for George W. Bush’s 2005 reform, according to NY Fed economist Donald P. Morgan.
Morgan calculates that coming out of a recession the bankruptcy rate would have surged to 8 filings per 1,000 households, compared to the recorded rate of 4 per 1,000.
In this light Bush’s reform, which has been criticized for failing to reduce the bankruptcy rate, seems more successful.
Bush’s reform was also criticized as a gift to bankers, meant primarily to keep individuals from discharging debt. Without this reform, one wonders if individuals would have been better able to weather the recession—or conversely if the crisis would have been worse.
Morgan says we need more research to see if the reform was effective:
In my view, a better measure of success of a bankruptcy reform is whether the reform lowered the cost and/or increased the availability of unsecured credit. The idea, admittedly textbook, is that lower losses to unsecured lenders under bankruptcy, combined with competition among lenders, should increase the supply of unsecured credit. In a study written shortly after BAPCPA took effect, two colleagues and I found no evidence that credit card interest spreads or excess spreads on credit card securitizations had fallen in response. This paper (by Simkovic) didn’t find any evidence of lower rates either. This classic paper by Larry Ausubel explains why, because of a particular form of adverse selection, excess profits in the credit card market might not lead to lower credit card interest rates. Ausubel argues that credit card lenders that might be tempted to cut rates to steal business from competitors are loathe to do so because they may only attract rate-sensitive borrowers who expect to carry large balances. But if those borrowers are riskier (by virtue of their large balances), cutting rates may attract a riskier pool of borrowers. That adverse selection may make credit card interest rates “sticky downward” even in the face of falling charge-offs. I plan to revisit the issue of how BAPCPA affected credit card charge-offs and interest rates in a future post.
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