Sunday, December 25, 2005

Merry Christmas From the Credit Card Industry

When challenged about the erosion of discipline in their ranks this year, Republican congressional leaders typically cited the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as an example of their productivity. Already we’re seeing year end review testimonials in the media that acknowledge Republicans had a bumpy ride but still managed “accomplishments” such as this odorous piece of legislation demanded by the financial services industry, passed by Congress, and signed into law by President Bush. Upon closer examination however, this “accomplishment” amounts to nothing less than class warfare waged on behalf of the super rich against the little guy. Indeed, the new bankruptcy law illustrates the sheer indecency of the Republican Party machine as well as the feckless cowardice of the Democratic Party.

During the economic boom of the 1990’s (remember that?) banks went on an irresponsible lending spree. They issued credit cards to people with either poor credit history or none at all. It was not uncommon for someone of questionable income or even no income to receive a platinum credit card from Citibank, Chase or Capitol One with a generous credit line. While attending graduate school I interned at the corporate library of American Express in 2001. I maintained a journal of my experience and memorialized a conversation with a Vice President I occasionally performed research for and was on good terms with. I asked this gentleman why American Express was targeting less affluent people and wondered if they were assuming an unreasonable risk in doing so. He told me, “They’re all going to have to pay eventually. The lawmakers are on our side because of heavy campaign contributions from our industry. First we have to get Joe and Jane Smith hooked on the great American drug: credit.” I followed up and asked if that might cause undue hardship for the middle and working class who were strapped for cash in the short term and didn’t understand the long-term consequences of burning a hole through their credit cards. His response to that was, “not my problem.”

Predictably, people in the middle and lower income brackets hit a wall when the economy went bust and jobs were lost. Many were confronted with medical calamities in their families, had no health insurance and no means of meeting their financial obligations. In the past such people had the option of declaring Chapter 7 Bankruptcy and getting a “fresh start.” Conservative critics typically excoriated the concept of a fresh start as an unjustified reward for profligate spending. In fact declaring bankruptcy is a lifeline for people in legitimate need.

A "fresh start" used to be the objective of American bankruptcy law. The new law requires people who earn more than the median income in their state to pay off their debts on a five-year repayment plan. In theory, lower income earners may still avail themselves of Chapter 7's debt-erasing provisions, but they’re confronted with all sorts of additional hurdles, including mandatory credit counseling, greater paperwork requirements, and rising lawyers' fees. The new obstacles make it virtually impossible for lower income people to declare bankruptcy. For a detailed analysis of the new bankruptcy legislation I recommend reading, Impact of Bankruptcy Legislation on Employee Benefits and Executive Compensation by Kurt LP Lawson and Andrew J. Love in the September 20, 2005 edition of Tax Management Financial Planning Journal.

Contrary to conservative propaganda most do not declare bankruptcy because of profligate spending. Typically, lower and middle-income workers are forced to declare bankruptcy because of a medical calamity in their family. If a lower income individual with limited or no health insurance can't declare bankruptcy when a child suffers from a medical calamity, they’re in danger of complete financial destitution – even homelessness. Indeed, many of these people are among the 43 million not currently benefiting from health insurance or their coverage is simply inadequate to meet their needs. The Republicans resist any health care reform because of the campaign contributions they receive from insurance companies. Yet they also impose obscenely difficult standards for people without health insurance to obtain a fresh start so the wealthy plutocrats of the financial services industry can further enrich themselves.

One wonders why American Express, Citicorp, Capitol One, Chase, MNBA and others are not held accountable for their lending practices in the first place. This is corporate welfare at its worst, rewarding corporate vultures at the expense of families in need. Incredibly, as Timothy Logan reported in the New York Times on December 11th, those who managed to declare bankruptcy before the new law took effect on October 17th are already receiving solicitations from major banks to apply for credit cards! What these banks are doing is tantamount to offering crack cocaine to recovering addicts.

Another important impact of the new bankruptcy law is that an indispensable safety net for small risk taking entrepreneurs is gone. Bankruptcy regulations that apply to large corporations are essentially unchanged. For example, United Airlines can declare bankruptcy and avoid their financial obligations regarding their employees' pension funds. However, the new law does facilitate economic distress on those small businesses that our economy is so dependent on for job creation. Unlike large corporations, individual owners usually finance small businesses, with money from their own bank accounts. Previously an owner of a failing small enterprise had the option of declaring bankruptcy so they could obtain a fresh start and still take care of their family. With that safety net removed it is far more difficult for the little guy to be an innovative risk taker. The Republican barons in Congress such as the Chairman of the Senate Banking Committee, Charles Grassley care little about the risk-taking entrepreneur. As far as their concerned, the new bankruptcy law is an “accomplishment” to be celebrated.

Sadly, the Republicans were aided and abetted by the support of eighteen Democrats in the Senate – including Minority Leader Harry Reid. For the record, New York Senator Hillary Clinton did not vote at all. Over seventy House Democrats supported the measure as well. Others who did not vote for it supported the Republicans in their parliamentary tactics and maneuvers to get it through. Senator Joe Lieberman of Connecticut was especially guilty of two-faced behavior – denouncing the legislation while supporting Senator Bill Frist’s efforts to shut off cloture. A few such as Senator Charles Schumer of New York valiantly put up a fight. Schumer actually tried to attach “poison amendments” to the new law and make it more difficult for people who blow up abortion clinics to declare bankruptcy in paying for their legal defense. That tactic worked for a couple years but without the support of the Democratic leadership the bill’s final passage could not be prevented.

The fecklessness of the Democrats on this issue was arguably their most shameful moment in 2005. With a united front the Democrats could have exposed the Republicans as a party favoring the fat cats at the expense of small businesses and their hard working employees. Instead, too many Democrats were on the take from the same greedy financial services industry that the Republicans were. Consequently, Senator Schumer was discouraged from making his fight overtly public. Senator Reid was highly motivated to maintain a united front on Social Security. But on this issue he was fearful of Democrats like himself being exposed as no better than his Republican counterparts. I have no doubt that a united front among the Democrats would have embarrassed a sufficient number of Republicans to at least make the new law less harmful on middle and lower income people. Instead the Democratic Party took a hanging curveball right down the middle.

If the Democrats were unable as a party to oppose this new law then what is the point of the Democratic Party even existing? How are they any different than the Republicans? Every Democrat on record as supporting this legislation deserves to be challenged in a primary. Any Democrat who supported this legislation and runs for President does not deserve their party’s nomination. Can you just imagine if some corporate lobbyist attempted to persuade Lyndon Johnson at his ranch to support this law? You would have wanted to reserve a hospital room in advance for such a person. Click on the link below to learn how every Senator and member of the House of Representatives voted.

To every public official who supported this law I ask one simple question: is this truly why you entered public life?


pansophia said...

Like most average citizens, I don't understand why government has allied with big business to make prey of their own citizens. All I can do is be cynical and paranoid about it: I know the media is giving me fake information, and I don't have personal access to anyone with power. Sure I can vote, write my congressional representatives, and volunteer for some public interest organization - but in the end I just feel powerless, without the information needed to make any sort of decision.

I've thought about filing for bankruptcy a couple of times this year, and I probably will eventually. Like just about everybody else, my tipping point was medical bills. Hospitals say they negotiate and arrange for payment plans, but that's not true. They send bills directly to collections agencies - and from there on out it's all threats and extortion. I don't understand why hospitals are allowed to do this: sending bills to collections agencies have serious consequences for people - it affects their credit rating and ability to get good terms for loans, and it may drive people into bankruptcy. All this can easily be prevented by offering a payment plan to a person who has just been through a medical emergency and may not have much in immediate financial resources.

By the way, my credit was perfect before this. I've never even carried a balance on my one credit card. All those years of being a good citizen did not pay off.

Robert Ellman said...

You're far from alone. The key is for all of us to realize we're not alone. On an issue like this I think it's important that politicians who benefit from the "Democrat" label while operating as "Republocrats" pay a price.

One I have in mind is Senator Joe Biden of Delaware. Very ambitious and planning to run for President, he supported the new bankruptcy law because of campaign contributions from the banking industry.

Once the race for the Democratic nomination for President is engaged in '08, Biden needs to be forcefully challenged by progressive activists to stand up for middle and lower income people. You know how the Republicans make their politicians sign pledges not raise taxes on the wealthy? Well how about liberal activists come up with a pledge for Democratic contenders to scrap the new bankruptcy law?

Democratic politicans such as Biden have for too long been able to get away with taking their constitutents for granted as long as they passed the pro-choice litmus test. Our power resides in making a high profile politician such as Biden the symbol of where the Democratic Party has gone wrong by denying him the nomination over this sort of issue.

Another target is Hillary Clinton who didn't even cast a vote when the law was passed. Let's make her take a stand and promise to agressively push for the resoration of the old bankruptcy protocol.