by Demosophist

From Todd Zywicki

As I have said before, this bill is at bottom about rewarding personal responsibility.

Spoken like someone who has always expected a steady wind at his back, and spent both stormy and windless days deeply sheltered.

Apparently the entities making the loans while practicing deceptive strategies to snare the "imprudent" deserve to have the rules waived for their imprudent extension of credit because they've achieved the special status of lovable con men. Meet the archetype of the species: Ward Churchill.

Gary Becker, on the other hand, suggests a self-referencial alternative to tweaking the bankruptcy system, answering most of my objections to Zywicki's rather aloof and one-eyed arguments:

Another approach that helps provide insurance is to encourage "equity" loans when human capital is the main collateral available. By equity loans I mean a system where creditors share in both the higher and lower earnings of debtors. So when earnings of a debtor are higher, the amount he or she pays back is greater than when their earnings are lower. This system is quite common in financing agricultural loans in poorer countries, as demonstrated by the research on loans in developing nations by Robert Townsend and others.

Since these type of loans already exist in poor nations with limited bookkeeping techniques and primitive commercial credit markets, there is no reason why they could not become more common in the richer nations, whether the US, Europe, or Japan. Debtors might have to submit tax forms that verify their incomes, the same way that these are required in obtaining student aid, Medicaid, and some other assistance.

The law might have to be written to encourage such equity loans. They may not always be feasible, but they are a more attractive method of "social" insurance than the bankruptcy system. They avoid a lot of litigation over assets, garnishment, and the like. In addition, those debtors doing better than expected automatically back pay more (sic), while those doing badly automatically pay back less, possibly nothing until they do better. This to me seems to be a much better way than tinkering with bankruptcy laws in meeting the legitimate needs of both creditors and debtors in an uncertain economic world.

The key here is "legitimate needs." There are obviously illegitimate needs as well as objectives that ought to be ruled out or discouraged by a credit system, and the Becker suggestion preserves continuity of the rule system for imprudent lenders and borrowers, while recognizing that the wind can be fickle.

(Cross-posted by Demosophist to Demosophia and Anticipatory Retaliation)

Posted by: Demosophist at 12:40 AM | Comments (12) | Add Comment
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