|
Larry, XXX-3463
2 pages and about 820 words.
According to the American Bankruptcy Institute (ABI), a record numbers of American consumers are opting for bankruptcy as a way out of financial duress. Over 320,000 individuals filed for bankruptcy in the first quarter of 1997 alone. This is more than filed for the entire economic malaise year of 1980. Here in Northern Ohio, the breakdown for the first quarter isn't available yet but all indications are that '97 will be a record breaker. Cleveland does it again. For example, over 1,400 more bankruptcies were granted in the 3rd quarter of 1996 than in the same quarter of 1995. This trend is continuing on both national and local levels.
How can this be? The US economy is experiencing a phenomenal growth rate. The stock market is pushing into record territory on almost a daily basis. Unemployment rates are the lowest in a generation. Inflation is almost non-existent. What gives?
Well, that depends on which side of the ideological battlefield you take your stance. There is a school of thought that looks at this type of information and sees good news. Good News! How can record numbers of people filing for bankruptcy be construed as good news? Orwell lives! The theory is as simple as this; more and more people are feeling good about the economy so therefore they are willing to take more risk. Or on the consumer level, they feel confident enough about their future to go out and buy. Problem is, the more risk taken, the more failure. Of course the other side of the coin is that more attempts at risk breed a better chance of success. So a certain amount of failure is actually good news. This view, although held by some free marketers, is decidedly in the minority.
On the other side of the battlefield things aren't quite as rosy as the indicators indicate. These naysayers of doom and gloom, as the rosy scenario free marketing guys like to call them, look at stats such as the run-up of consumer debt and say all is not well. "The continued record pace of bankruptcies tracks the sustained growth in consumer spending and debt," explains Samuel J. Gerdano, Executive Director of ABI. There is a correlation.
So what should our legislators do? The Rosy scenario guys would have us do nothing. Let the market punish those who abuse the privilege of credit. On the other hand, the doom and gloom dudes think something should be done to check the rampant increase in credit card debt.
Here's where the problem becomes complicated.
One possibility would be to limit the amount of interest a finance company could charge its customers. A few years back, the Ohio Legislature looked into doing just that. At the time, there was a small outrage brewing over the cost of credit. Consumer credit card rates were climbing well into the 20% range and some unsecured loans were hitting 31% and more. Consumer advocates, feeling proper righteous indignation, invoked biblical anti-usary language to prove their point. Of course the bill never went anywhere.
The point of this little trip down memory lane is to ask the question what would have happened had Ohio and other states joined New York in limiting the interest rates finance companies could charge? Hate to say it but the economy might not be performing as well as it has been. Look, economic activity has to come from somewhere. You can't just wish a recovery. Remember, the late 80's and early 90's were filled with oppressive economic news. Stock market crashes, Savings and Loan bailouts, soaring federal deficits provided fodder for pessimists everywhere. President Bush tried everything including a war to jolt the economy. Nothing worked.
But little by little, consumers started to feel a bit more confident. They started to leave bad news behind and went shopping. Meanwhile, consolidations, mergers and start-ups were occurring at a startling rate in the debt-generating business. Competition was fierce. The market was flooded with pre-approved credit cards. As good credit card customers became harder and harder to sign up, banks and credit card companies decided that basically anyone breathing deserved a visa to the American Dream.
And so more and more people without the financial wherewithal to support credit binges ended up in bankruptcy court. Those who grant consumer credit simply adjusted interest rates to compensate for the increased risk of granting credit to people who might not deserve credit. You are literally paying for the indiscretions of the freewheeling creditors as well as the bankruptees.
The point is, purchases made by the 1.1 million people who declared bankruptcy in 1996 might not have been made. That has to effect the overall performance of the economy. This is, after all, a consumption oriented economy. Of course interest rates might not be as high if the debt industry had been more discrete. The question is, can this really be a healthy way to grow an economy?
|
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
