How Banks Are Bitten By a Law They Sought

TOO MUCH OF WHAT'S WISHED FOR

Naked Capitalism (nakedcapitalism.com) highlights the irony of the bankruptcy law, which was changed in 2005 after banks lobbied to toughen rules against credit card borrowers. These very laws are now hurting the same banks by helping to drive foreclosures in the housing market.

"In a bit of schadenfreude, it looks like the new rules may have increased the profits of their credit card business at the expense of their mortgage business, and in the case of big mortgage lenders, their balance sheet," Yves Smith writes.

Mr. Smith highlights a Bloomberg article that quoted Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank. "Be careful what you wish for," he said. "They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures."

The bankruptcy code was revised to make it harder for debtors to qualify for Chapter 7, the section that erases nonmortgage debt. Instead, they were more likely to qualify for Chapter 13, which gives them up to five years to pay off nonhousing creditors. As a result, people are putting their credit card payments ahead of their mortgage payments.

The Bloomberg article points out: "The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp. In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington."

KRUGMAN VS. KATZ

Greg Mankiw (gregmankiw.blogspot.com) points out the opposing views of economists Paul Krugman and Larry Katz over inequality in America.

Mr. Krugman's perspective, taken from his New York Times column: "Recently, Henry Paulson, the Treasury secretary, acknowledged that economic inequality is rising in America. In a break with previous administration pronouncements, he also conceded that this might be cause for concern. But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that 'it is simply an economic reality, and it is neither fair nor useful to blame any political party.'

"History suggests otherwise. I've been studying the long-term history of inequality in the United States. And it's hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington."

Now, Mr. Katz's view, from a recent paper he co-authored with Claudia Goldin: "We document the spectacular rise of U.S. wage inequality after 1980 and place recent changes into a century-long historical perspective to understand the sources of change.

The majority of the increase in wage inequality since 1980 can be accounted for by rising educational wage differentials, just as a substantial part of the decrease in wage inequality in the earlier era can be accounted for by decreasing educational wage differentials."

Mr. Mankiw points out that the two economists have similar, left-leaning politics. "So there is no large ideological divide. Nonetheless, they seem to have polar opposite views of economic history. Why?" Why indeed.