credit and bankruptcy

http://www.youtube.com/watch?v=hn5EP9StlVA

Michelle White. Journal of Economic Perspectives—Volume 21, Number 4—Fall 2007—Pages 175–199

Serves as a public policy discussion that deals with social, moral, and economic incentives.

My previous experience with MasterCard Worldwide

It’s relevant do today’s economic situation.

“…..American Express Co., whose customers are generally affluent, said Thursday it expects slower spending and more missed payments on credit card bills to hurt its profit throughout 2008….”

“…Credit-card debt rose by $8.7 billion, or 11.3%, in November to $937 billion after an 8.6% gain in October. It was the biggest increase since May and the fourth-largest gain in credit-card debt since the expansion began in November 2001. Some economists say consumers are using their credit cards more because they can't tap their home equity as easily as they could a year or two ago….”

Though the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was intended to eliminate the number of bankruptcies, it has increased financial distress among US consumers.

Adverse events? Casino gambling? Growing Middle-class?

Dave Pollard. “THE TWO-INCOME TRAP: WHY LENDERS WANT YOU TO LIVE BEYOND YOUR MEANS.” Salon.com . 11 Jan 2004. http://blogs.salon.com/0002007/2004/10/28.html.

Allowed for fewer gains from bankruptcy by more closely regulating what you can file for and how often

Made bankruptcy more expensive

More difficult to file for bankruptcy, therefore, significantly less bankruptcies filed.

Dramatically reduced lenders’ losses from default

Credit Card companies begin to lend more, even to consumers with bad credit.

The Rational Consumer The Hyperbolic Discounter

Consumption insurance Promotes self-employment and small

business Reduces the Moral Hazard

Fairly low asset exemption level Low bankruptcy costs Low bankruptcy punishment “In general, bankruptcy policy should be

more pro-debtor if hyperbolic discounters wish to control their borrowing behavior, since lenders supply less credit under a more pro-debtor bankruptcy policy.”

Require credit card lenders to raise minimum payment levels.

Prohibit rewards programs that encourage over spending

Stop marketing to college students Eliminate unsolicited card offers Force companies to provide more

information Reintroduction of usury limits

“… an appropriate policy response to this kind of overborrowing must both discourage hyperbolic discounters from borrowing too much and penalize lenders who take advantage of hyperbolic discounters’ tendency to overborrow.”

How can we relate this discussion to social, moral, and economic incentives? Specifically, how have these changed with the evolution of the credit card markets?

What effects could the author’s proposed bankruptcy reform have on the economy?