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A Small Update on the Bankruptcy Bill

January 18, 2007

The Economist Free Exchange blog has a post on John Tierney’s NYT story about shopping and neuroscience. The most interesting part of the post however is all the way at the bottom. I had not heard a follow up to the Bankruptcy Bill that had passed in 2005 that made it more costly to declare bankruptcy. Here is the passage:

This suggests that the traditional explanation for Americans’ low savings rate may be the correct one:  Americans use more credit, which lowers the pain of buying.  But the culprit may not be evil moneylenders.  One might instead turn on the friendly bankruptcy attorneys; there is emerging evidence that making it harder to declare bankruptcy has made banks more willing to extend credit, but borrowers less willing to take on more loans.

I hated the bill. It appeared to be crafted for the credit card companies and other lending institutions. According to this, they have extended even larger amounts of credit. The larger point is that consumers are declining these offers.

That is a tremendous positive effect and one to keep in mind: Don’t underestimate the power of incentives.

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