Congress Returns:
Wall Street Trembles
Jude Wanniski
September 4, 2002


When Congress adjourned for its August recess, Wall Street rallied nicely, one reason being the failure of the bankruptcy bill, HR 333, to be enacted even after it emerged from a Senate-House conference. It then appeared the bill, which got its start five years ago in the earliest days of the monetary deflation, would not come to a vote in the weeks before the November elections because of a provision violently opposed by the pro-life, anti-abortion lobby. All that remained was to see if the House Republican leadership would decide to give a major push for the bill when Congress returned yesterday, or to allow it to die with this 107th Congress. When I saw the market go into a steep nosedive yesterday, I called and found the House leaders had decided to give one big push, to collect enough Democratic votes to offset the losses they would have in their own ranks because of the pro-life lobby. The provision would make it illegal for people found guilty of committing violence against abortion clinics to shield their assets via bankruptcy in order to avoid paying fines and restitution. 

Whether you are pro-life or pro-choice, the conference report on the reform bill is a dreadful piece of legislation that will end any chance of economic recovery anytime soon. It has not gotten much ink, although it has been around so long, because the intellectual forces that should be opposed to making bankruptcy more difficult see the legislation instead as a way of cracking down on deadbeats. The lobbying effort against the harsh provisions of the legislation has produced some strange bedfellows, as the pro-choice members of the Congressional Black Caucus are opposing the bill because it clearly hits hardest at the folks at the bottom of the pyramid. The Wall Street Journal editorial page, for example, opposes the provision punishing pro-lifers, but otherwise thinks the bankruptcy provisions are just fine. The issues are cutting all across party lines. Sen. Bob Torricelli [D NJ] is one of the chief architects of the legislation and is eager to see it adopted while Sen. John Corzine [D NJ], a fellow liberal, is voting against it. Any member can explain to his or her constituents that they voted for it or against it for one reason or another. (What a country!) Sen. Hillary Clinton [D NY] has not made up her mind, although she did vote for the bill before it went to conference. 

Tuesday's nosedive was attributed to a variety of trivial causes, none of which would be able to discourage the market to the tune of 350 points on the DJIA. One of the most distinguishing features of American bankruptcy law relative to Europe`s laws has been the relative ease by which individuals can get out from debts and get a fresh start in life. In Europe, one failure in life is all an entrepreneur gets. This bankruptcy "reform" would make it much more difficult for individuals to make use of Chapter 7, the most common form of bankruptcy filing, by which some assets can be sold to pay a portion of debt, with the rest being erased. Individuals with incomes higher than state averages would be forced into Chapter 13, where treatment is more severe. The San Jose Mercury notes that the legislation would be especially onerous on the Silicon Valley population that has already been beaten up severely by the stock market decline and the tax laws: "Filing for bankruptcy will be more costly and complex. Bankruptcy cases would require more documentation, extra legal time and more court time. That`s work that typically falls to attorneys -- who would be forced to eat the expenses or raise their fees. In some case, debtors simply wouldn`t be able to afford to go broke."

Those Poly clients who attended our 2001 client conference in Palm Beach may recall how I directly warned Senator Torricelli and Sen. Chuck Grassley, then chairman of Senate Finance, how destructive the legislation would be to economic growth, especially as it would be hammering debtors at a time of severe adjustment to the deflation which requires debtors to pay with much more expensive dollars. Both Senators seemed amused that their attempts at bipartisanship in crafting this legislation would arouse my ire. There were more than 1.5 million bankruptcies in 1999, two-thirds of them in Chapter 7. The American Bankruptcy Institute, which neither supports or opposes the bill, says it expects the numbers to continue to climb, a poll of its 8600 members showing 90% to 95% seeing ever higher numbers "as a result of the hangover of debt burden from the 1990s. That level of debt takes time to wring out. That has not crested yet." 

The bill does have a provision permitting a 180-day period where the old law still applies. Expectations would be that there would be a huge bubble in that period of new filings, as lawyers and accountants would be heavily advertising warnings to get in for protection before the door closed. One of the reasons the legislation has gotten this far is that it is supported by the Credit Unions, which got provisions beneficial to them in the bill. If you wish to learn more about how bad the legislation will be from a debtor perspective, here is the detail from the Public Interest Research Group.

The incentives in the electorate are now all in the direction of making sure the bill does not come to a vote in this session and to see that the Democrats gain control of the House in November. If that happens, according to Sam Gerdano of the Banking Institute: "The bankruptcy bill as we now know it will be gone, and there will be a whole different bill in play, one that doesn't have that nice little carve-out for credit unions in it.... A Democrat-led House would create a totally different bankruptcy reform bill, one that`s aimed at predatory lending, payday lending, and subprime lending. It will be aimed at creditor processes, not debtor abuses. It will call for restrictions on marketing of credit products, restrictions on credit available to college students, high school students and the elderly. All of these will be fertile topics."

Pretty dismal, but we have repeatedly warned that the monetary deflation itself is only the beginning of the damage the Congress can do to the economy to "protect" us from its side effects. The corporate governance legislation by itself sliced 1000 points of the DJIA and we are lucky the options amendment was shelved, or the DJIA would now be testing 7000 instead of eyeing 8000. We remain in a vicious circle with no leadership in either party to pull us out, and no opinion leaders addressing these issues correctly. How about President Bush`s position on the bankruptcy bill? He has announced that he will sign anything that comes to his desk. He is just too busy thinking about doing Iraq.