Motives and Consequences
By Arnold Kling
Costs of lending are always passed on to the consumer. No one is forced to lend (well, there is the Community Reinvestment Act, but that’s a quid pro quo, and an exception), so lenders will either pass increased costs along, or withdraw from the highest risk market segments. Making it harder for borrowers to not pay decreases the expected charge-off rate. As a result, the interest rate will decrease and more significantly the availability of credit will increases.
On the other hand, Paul Krugman writes,
The bankruptcy bill was written by and for credit card companies…any senator who votes for the bill should be ashamed.
This is a classic illustration of Type C and Type M arguments. Krugman is focused on the motives of the credit card companies, and he implicitly assumes that bankruptcy legislation is win-lose, where if the credit card companies win, then creditors lose.
‘Hedge Fund Guy’ is looking at the consequences of bankruptcy reform. By making it more difficult to abuse the system, it would allow lenders to offer better terms to high-risk borrowers. Therefore, bankruptcy reform could be win-win for most high-risk borrowers and for lenders.
For Discussion. Suppose that Congress wanted to protect homeowners by allowing a family to keep its house if it cannot pay the mortgage. How would this affect the mortgage market?