1115.org

During the debate over the bankruptcy bill this spring, I predicted:

Even Republicans who can’t shut up about the free market don’t have a leg to stand on as this bill rigs the system so that banks can make riskier loans at higher interest rates without worrying about default. It’s a sign of the times that no one has a leg to stand on yet the bill will pass running away.

Now there was never a chance of that prediction failing to materialize, but the bill just passed in April, and already banks are making “riskier” loans:

U.S. banks, faced with rising mortgage competition as home sales advance, eased lending standards for the first time in 11 years, the Office of the Comptroller of the Currency said.

“We see an increase in the easing of underwriting for both real-estate and commercial products,” said Barbara Grunkemeyer, the agency’s deputy comptroller for credit risk. “The banks can take on a little more risk because their portfolios are in good condition.”

That’s not really what’s happening, and if Grunkemeyer is unaware or unable to admit what is causing the lower lending standards, then Bloomberg News reporter Amy Strahan should have. Banks are readjusting their lending standards to adapt to the new reality created by the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” The bill’s restrictions include an income test and excludes many types of debt from discharge. The real payoff to banks, credit card issuers, and mortgage companies comes into play when they issue new credit. Interest has always been determined by creditworthiness and the length of the note. Consumers with bad credit are bigger credit risks and thus faced steeper interest rates, but now that bankruptcy (and its inherent discharge of debt) is simply not an option for many people, risk is much less of a factor. Even if borrowers don’t have the ability to repay the loan, their only choice may be garnishment of wages for as long as it takes to settle the debt. In effect, the legislation allows banks to charge the same or more interest as before, with drastically reduced risk.

That’s not capitalism, it’s corporatism, and it was bought wholesale by banking companies:

Finance and credit companies contributed more than $8.2 million in individual and PAC contributions during the 2004 election cycle, 64 percent to Republicans. Credit card giant MBNA’s employees and PAC contributed more than $1.5 million, including $354,000 to President Bush’s reelection campaign. The company spent $5.2 million on federal lobbying in 2003.
[…]
The American Bankers Association contributed more than $2.2 million in individual and PAC contributions to federal candidates and parties during the 2004 election cycle, 62 percent to Republicans.

Republicans got the lion’s share of the contributions, but many Democrats played the wrong side of this giveaway. If this example of how a few million dollars in donations can easily become billions in windfall profits isn’t the perfect argument for campaign finance reform, then nothing will ever be.