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In Which I Propose a Conservative Position on Debt & Bankruptcy

That the economy is horrible beyond the government’s “statistics” is not in doubt.  And that too much debt is at the heart of our economic malaise also cannot be doubted.  As I made the trek from left-wing Marxism to the vast right wing conspiracy, I started to believe that it might not be a bad idea if we had rather less credit overall and more cash, whether in personal finance or in the mysteries of governmental fisc.

Nonetheless, I wasn’t quite aware of how bad things were “out there” until I happened upon a bunch of blogs written by out-of-work JD’s who are facing a mountain of debt, zero job prospects, and no way out except for leaving the country for good.  Here’s but a small sampling: Exposing the Law School Scam, But I Did Everything Right, Jobless Juris Doctor, Children of Debt, and others.  Granted, many of these blogs and their commentators have the whiny tone of those who feel entitled to something more, something better, than they got as the economy cratered.  Maybe some of them were bamboozled by the legal-industrial complex, and deserve everything they get.  I find it somewhat difficult to summon up a lot of outrage and sympathy on behalf of these unemployed lawyers, given that I’m still carrying six-figure debt from my stint at law school.

But I happened to have read those while I was thinking about another group of the heavily indebted: homeowners.  Not just the irresponsible, sub-prime, interest-only no-doc loan borrowing fools who thought they would just cash in while the real estate bubble was in full effect, only to find themselves holding the bag, in debt for hundreds of thousands of dollars they could never pay back, with a house worth half what they paid — but the responsible ones, who borrowed so-called prime mortgages, 30-year fixed deals, only to get hit with the double whammy of declining home values and unemployment, are also starting to get hammered.

There are now companies who advise homeowners to go into strategic default on mortgages.  Respected people, like Roger Lowenstein, are taking the position that strategic default (in which a homeowner is able to pay the mortgage that is more than the house is worth, but chooses not to) is the rational thing to do for many homeowners.

The unemployed JD’s (and others who have made poor choices and taken on massive education debt on the promise that education leads to higher incomes) would love to strategically default on their debt.  Actually, they’d love to default, period, on their debt and start over.  Unfortunately for them, that is not possible.  Student loans, you see, are not dischargeable in bankruptcy.  The only option for someone unemployed, but carrying massive educational debt, is to flee the United States.

Debt, and how to deal with it, may be one of the central struggles of our time.  The conservatives have focused for the most part on government debt, which surpassed $13 trillion for the first time in June of 2010.  But when it comes to personal debt, conservatives (and Republicans) have tended to take the position that repaying debt is a moral issue, and have taken a hardline stance against debtors.

The Response Thus Far from the Right: Repayment of Debt Is a Moral Imperative

A good example, from the standpoint of ideology, is this great article from Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, in the City Journal.  (I have rarely found anything in that fine publication with which to disagree, and this article is only a partial exception.)  Zingales takes the position that strategic default is a menace that threatens the foundation of the financial system:

Undermining the social norm to repay mortgages, as Lowenstein and White do, is thus a very bad idea. You might just as well say that when a theater is going up in flames, it’s “rational” to trample other people in rushing to the exits.

Accordingly, Republicans in Congress have tended to be hostile to legislation that would make it easier on debtors.  For example, House Republicans have introduced (and passed in the House) legislation that would penalize strategic defaulters:

The language prohibits the FHA from “newly [insuring] any mortgage under this title that is secured by a 1- to 4-family dwelling unless the mortgagee has determined, in accordance with such standards and requirements established by the Secretary, that the mortgagor under such mortgage has not previously engaged in any strategic default with respect to any residential mortgage loan.” It says that the FHA needs to figure out what an “intentional default” is in the first place.

With all due respect, I think this is bad politics.  I also think it goes against a fundamental American value enshrined not only in the Anglo-American tradition, but in the history of the nation.  I believe conservatives (and by extension Republicans) should take the position that what is needed is not moralizing to debtors (no matter how stupid their individual decisions may have been), but restoring the bankruptcy code to its original intent: providing a fresh start for individuals and companies.

A Brief History of American Bankruptcy Law

A blogpost is no place for a thorough review of the history of the bankruptcy law of the United States.  Those interested might start with Debt’s Dominion: A History of Bankruptcy Law in America.  The opening paragraph of the book is worth quoting in this context:

Bankruptcy law in the United States is unique in the world.  Perhaps most startling to outsiders is that individuals and businesses in the United States do not seem to view bankruptcy as the absolute last resort, as an outcome to be avoided at all costs.  No one wants to wind up in bankruptcy, of course, but many U.S. debtors treat it as a means to another, healthier end, not as the End.

The way I learned about bankruptcy, in law school, Americans from the earliest Colonial days were inimical to how English law treated debtors.  Indeed, many of the early Americans had personal experiences with debtor’s prisons, having been drawn mostly from the lower classes.  America represented a fresh new start for them, fraught with peril, but nonetheless, an opportunity for a man to start a new life.  That spirit of a “new start” infused the American bankruptcy laws from the very start.  It is no coincidence that one of the enumerated powers of Congress in the Constitution was “To establish… uniform laws on the subject of bankruptcies throughout the United States” (Article 1, Section 8).

The first Bankruptcy Code was promulgated in 1800, not too long after the establishment of the United States itself, and the current Code was enacted in 1978, although amended numerous times thereafter.  And the purpose of bankruptcy has been articulated a number of times by the Supreme Court to be to allow a fresh start for debtors:

The central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. (Grogan v. Garner, 111 S.Ct. 654.)

To be sure, there is the idea that only “honest debtors” should find relief through bankruptcy, but I regard that as meaning those debtors who did not engage in fraud or crimes to get into debt.  The stupid debtor may nonetheless be an honest one.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was, in my view, a mistake by the Republican-controlled 109th Congress and President George W. Bush.  The stated legislative purpose was to make it more difficult for debtors to get relief through bankruptcy:

Most people think it should be more difficult for people to file for bankruptcy. Americans have had enough; they are tired of paying for high rollers who game the current system and its loopholes to get out of paying their fair share.

With all due respect to Sen. Grassley (which, in my case, is precious little), I disagree.  I don’t believe that most people in 2005 thought it should be more difficult for people to file for bankruptcy.  In any event, I do not believe that most people in 2010 think it should be more difficult to file for bankruptcy, and to have debts discharged.

The Politics of Debt

Those of us active in the conservative movement know full well that the media’s portrayal of the Republican Party as the party of fat cats and Wall Street is simply wrong.  (Well, I’d actually say that it’s a lie perpetrated by the Propaganda Wing of the Democratic Party, but that might be, er, inflammatory.)  We know, for example, that Goldman Sachs donates primarily to the Democratic Party with 75% of the contributions going to Democrats in 2008.

But legislation like BAPCPA and the new anti-strategic default law makes it far too easy to paint the GOP as the party of bankers, credit card companies, and mortgage lenders.  In the current economic environment, I believe that is unwise.

The mortgage industry, based on the two pseudo-governmental companies Fannie Mae and Freddie Mac, is more or less a creation of the Left, with the willing assistance by the corrupt Right who cared more about re-election and lining their pockets than standing on principles of fiscal responsibility.  So why are we now attempting to defend the indefensible?  Why are we now going on about the moral responsibility of the individual to pay his debts, when businesses and corporations routinely make business decisions to walk away from debt?  Lowenstein writes in the NY Times:

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

For Republicans (and conservatives) to be in the position of coming down hard on consumers, while ignoring the business decisions of Morgan Stanley and Goldman Sachs is strange indeed.  One might even call it some sort of a political death-wish, especially in the era of Tea Party Power.

If repayment of debt to the bitter end were somehow part of the fabric of the United States, and was a bedrock principle of the republic, I would understand that we conservatives need to take a stand on principle.  But as the history of bankruptcy law suggests, there is no such moral principle in our tradition.  In fact, our history as a nation and as a people suggests precisely the opposite tradition: in America, you are allowed to start over, unencumbered by past mistakes.

This does not mean that the individual does not pay a price for those mistakes.  Bankruptcy is not a get-out-of-jail-free card.  It wrecks your credit for years on end.  You will find it more difficult to get a job, buy a car, get a credit card, and you can just forget about buying a house for a good long time.  You may have your wages garnished, get put on an allowance by a court-appointed trustee, and may end up losing most of your assets (if you had any).  The price for filing bankruptcy is high indeed.  But at least you get a fresh start.

Consider the economic prospects for the Millenials, the largest demographic group after the Boomers, and the ones most likely to set the longterm trends for politics in the United States.  Most of them self-identify (or at least did in 2008) as liberals.  They have been brainwashed by the leftist academy and the leftist celebrity-driven culture of the 20th and 21st century, and as a result, went for Obama by a 2-to-1 margin (66% voted for Obama) in 2008.  Little did they realize in 2008 that Obama-Reid-Pelosi policies, such as socialized medicine, takeover of industries, higher taxes, and the like would be financed largely by them.

To paraphrase Malcolm X, they’ve been had; they’ve been took; they’ve been bamboozled.  Some of them are waking up.  Consider some of the results of the National Journal Heartland Monitor Poll in January of 2010, as reported here:

  • 46% say a four-year college degree is an economic burden.
  • 45% percent favor a left-leaning agenda of investment in infrastructure, education and research (which means 55% do not)
  • Only 39% would vote for Obama if the 2012 election were held today, with 50% voting for another candidate

I believe that personal debt, particularly student loans, will be an extremely hot topic for Millennials, along with fiscal policies.  The passion amongst this generation about the education bubble is intense, judging by the blogs and comments of the unemployed JD’s (and these are supposedly among the more successful of the Millenials, given that they finished college, studied enough to get into law school, then graduated with law degrees).

I believe that the conservative movement could find that the majority of Millenials are ready to get real, instead of continuing to dream on about hopeychangey fairy dust.  But not if we do not have a plan, a platform, and a set of principles about debt.  Continuing to insist that debt is a moral issue is not doing us any favors, and it goes against the traditions and principles of the United States.

Some Next Steps

First, I believe that Republicans should immediately push for eliminating the non-dischargeability of student loan debt through the Bankruptcy Code — a “reform” that was put into place in the 2005 BAPCPA act.  That piece of legislation is most firmly a Republican law.  It has our fingerprints all over it, and therefore, we should be the ones arguing for its repeal or reform.  Those Republicans who voted for it should simply say, “We made a mistake, and we’re going to fix it.”

Second, I believe that Republicans should back away from the anti-strategic default legislation.  Since that has already passed the House, it’s up to the Senate Republicans to defeat it, and convince their colleagues in the House that trying to punish debtors is neither smart nor principled.

Third, I believe that conservative intellectuals should immediately work on what would constitute a principled, free-market driven, Constitutionally faithful, and freedom-enhancing approach to debt.  Such an approach must balance the need for individuals to take responsibility for their mistakes, but also grant them some ability to have a fresh start in life.  Permanent debt-slavery, as is currently in place particularly for student loans, is not a conservative principle.

Based on those principles, the conservatives (and the GOP) should put together a legislative agenda that ensures penalties for nonpayment of debt, but affords a way out, some way of getting a fresh start.

What Say You?

I realize that some of these ideas may go against the grain of conservatives both here at Redstate, and elsewhere.  I know that most of us embrace the idea of personal responsibility, and repayment of debt is surely part of that.

Nonetheless, I also believe that urging for personal responsibility does not trump considerations of liberty; and oftentimes, liberty trumps personal responsibility.  A conservative might try to persuade people, for example, not to engage in extramarital affairs; but making infidelity an actual crime is, I believe, going a step too far for most conservatives.  Because liberty is our core value as Americans and as conservatives.

The current system for debtors is deeply inimical to liberty in a way that is inconsistent with American tradition.  We conservatives should claim the higher ground, deeply rooted in the American experience, American tradition, and even the Christian ideals that undergird our civics: that atonement, while painful, will lead to forgiveness.

Many thanks for reading this far, and I look forward to your thoughts.

-TS

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