Today Congress passed the “The Deflation Guarantee Act of 2005” currently known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”. Twenty years from now economists are going to be studying legislation from this Congress and signed by this administration and be wondering: “What the * were they thinking?”.
Consumer Protection Act? LMAO
Anytime this administration passes a law with the “protection” in it, assume it will do just the opposite. Credit card companies have made record profits lending money at obscene rates, jacking interest rates and fees up at the drop of a hat, lending money to anyone that can breathe, charging interest rates that are down right usurious, and now that the economy is on the verge of collapsing wants guarantees from Congress and the Administration that they will be “paid back”. Never mind that at 30% interest rates they have already been paid back time and time again, they want to keep earning 30% from now until eternity. This was a bill written by loan sharks, and bought via payoffs (otherwise known as campaign contributions) to those voting for this bill. It has NOTHING to do with “Consumer Protection”.
I believe this will backfire in many ways, and not all of them are fully understood yet. First let’s look at some highlights:
1) Before anyone can file bankruptcy under the Bankruptcy Reform Act, they must receive a certificate from an approved non-profit credit counseling agency that states that they have received a briefing on opportunities for available credit counseling and have been assisted in performing an individual budget analysis. The legislation mandates that the agencies offering the counseling be nonprofit in nature, such as the Consumer Credit Counseling Service of America (CCCS). But according to Jeffrey Morris, resident scholar at the American Bankruptcy Institute, the amount of time necessary to complete the counseling may take debtors away from work, which would put the struggling debtor even farther behind.
2) A small but vitally important part of the 500-page bill is the six-page section dealing with a “means test.” The “means test” is the system by which the IRS determines who can legitimately file for bankruptcy and who cannot. The test is a rigorous process involving examination of the debtor’s income and expenses, calculations as to whether or not their expenses meet the standards of their area, and judgments relating to whether or not they genuinely qualify for a Chapter 7 filing. If the combined gross income of your family is greater than the median family income in your state, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 bankruptcy where your debts are eliminated. The “means test” is an inflexible standard designed to leave no leeway for debtors to abuse the system, but in the process it is bound to penalize a great many people who have fallen into bad circumstances through no fault of their own.
3) If required to file a Chapter 13 under the means test, your monthly expenses will be compared to the IRS National and Local Standard Expense guidelines. The Bankruptcy Reform Act strictly limits the amounts you can claim as expenses.
4) Another provision of the bill places the burden of proof for bankruptcy on the debtor’s lawyer, requiring the attorney’s signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. Many lawyers will demand their fees up front, or they will decide the case isn’t worth their time.
Here is a discussion on some of the bill’s ramifications.
OK Mish what the heck does this have to do with deflation and why is this legislation a bad idea? Those are good questions and we must first start with a definition of deflation: Deflation is a reduction in money supply, a monetary phenomenon often associated with falling prices and lessoned demand for goods and services.
How will this bill help bring on deflation?
1) Anyone currently on the edge will be best advised to file for bankruptcy BEFORE this bill takes affect in October. There is an incentive now, if at all in doubt to file now and get it over with. I expect a dramatic increase in bankruptcies before this bill kicks in. Bankruptcies are inherently deflationary since the result is a write off (destruction) of money.
OK Mish what happens after the bill passes?
2) After this bill passes, greedy credit card companies will start losing repeat balance carrying customers. (That is actually a good thing but it sure is not the “purpose” of the legislation). Perhaps they get paid off but probably not. How can people that fall under chapter 13 then lose their job or get ill ever pay back? They can’t and they won’t. I speculate many will never use credit cards again. Speaking of which, it is quiet possible that as part of that credit counseling, people are asked to or even required to destroy their credit cards as part of the bankruptcy judicial hearing. It will now be up to a judge to decide is it 13 or is it 7 and what the requirements will be.
3) It is highly likely that many of the filings after this bill passes will be forced kicking and screaming chapter 13’s. What will happen is this: Consumers will be required to pay off their credit cards (perhaps at 0% or some amount set by the judge) perhaps with wages garnished if the consumer refuses. Consumers underwater on houses, cards, and deep in hock will absolutely be FORCED to cut back on consumer spending. They will be forced to start living within their means. This process will have a very, very sobering affect on the economy. Card companies will get paid back, but they will have lost a balance carrier for life.
4) Anyone forced to file for chapter 13, will be in debt slavery. Debt Slavery is the cornerstone of this administrations’s “Ownership Society”. Debt slavery might guarantee repayment, but it will have a potentially great cost and social upheaval. Also anyone going thru debt slavery will take great pains to avoid it in the future. Monetary growth will likely fall off the cliff. That is in and of itself the essence of deflation.
5) I am sure there are unforeseen consequences to this act that no one can figure out at this time, but they are coming and likely to be brutal. I confidently predict that years from now economists will be discussing this piece of legislation and the role it played in accelerating the upcoming global recession.
Note 1: Before anyone gets all bent out of shape, I admit there are abuses of the current system. As a % however they are quite small. Because that % is small, credit card companies have made record profits. Part of their risk in lending at obscene usurious rates is that some people default. Card companies want to be free to prey on consumers at no risk. That is the flaw in this bill, and also why it can not possibly work. This bill does not reduce interest rates on cards, fees, or anything else. It is the most one sided anti-consumer bill EVER passed by Congress.
Note 2: I am predicting deflation regardless of what the affects of this bill are. The headline title of this blog is therefore a bit misleading but I will lay the case that multiple bills passed by this Congress will enhance the deflationary housing crash/credit crunch that is about to happen just as “Smoot-Hawley” enhanced but did not specifically cause the Great Depression.
Enquiring Mish readers might be wondering what other bills I am referring to that are deflationary. Here goes:
The “Job Destruction Act of 2004” is right up there on the list. We discussed that bill in Searching For Jobs. The cornerstone of “The Job Destruction Act of 2004” currently know as “The Job Creation Act of 2004” was legislation allowing companies to repatriate funds sitting overseas at a tremendously reduced tax rate if it was used in activities deemed to create jobs (most of which did nothing of the kind) but one approved activity was mergers which I believe I proved is guaranteed to destroy jobs.
Is there anything else? Of course there is:
The “Medicaid Handout Bill of 2004” practically guaranteed consumers will pay the highest rates possible for prescription drugs.
In a friendly but spirited debate with The Nattering Naybob we discussed whether or not this Congress was stupid enough to pass another Smoot-Hawley Tariff act. Mr. Naybob writes:
I have read two excellent missives on Protectionism at Mish’s GET Analysis Blog. Mish makes a valid comparison of the current legislation to Smoot-Hawley enacted in 1930:
Mish asks: “Are we bound and determined to replay the great depression, complete with a more modern version of Smoot-Hawley?”
I feel I should weigh in at this point. Fear and fret not, a semblance of propriety must be maintained, but above all, control. Perception is not reality, money is. All the Smoot-Hawley type protectionism talk is nothing more than saber rattling, misdirection and sleight of hand for the public’s consumption. The legislation in question is a ruse and sheer theater.
I want to believe the “Nattering One”, but when I look at the track record of legislation passed by this Congress has passed I am in serious doubt. Even If one assumes Naybob is initially correct and this starts out as a bluff, what happens if the public catches the spirit (not realizing it was supposed to be a bluff) and demands action? What then? Personally I think it is only a bluff at the margin. In other words SOME are bluffing to be politically correct; others are quite likely just plain stupid enough to pass something like this.
Just today Bush Pressures China on Currency, Taiwan. Not only is Bush applying public pressure to a country that will not give in to such nonsense, he ups the ante by dragging Taiwan into the picture. “President Bush ratcheted up pressure on China on Thursday to float its currency to permit fairer trade and said he expects Beijing to keep the peace with Taiwan.” If that was not enough he went on to say “I’m constantly reminding China that a great society is one that welcomes and honors human rights, for example, welcomes the Catholic Church in its midst, doesn’t fear religious movements”. What the heck is that all about? Can anyone tell me what Bush is attempting to accomplish by dragging Taiwan and religion into this?
Also today As rhetoric sharpens, China skips talks.
On a March 29 flight to Seattle, the U.S. Treasury secretary, John Snow, dictated a letter to Hu Xiaolian, China’s new top foreign-exchange regulator, expressing the hope they could work together. Around the same time, China sent its own message to the Treasury: Jin Renqing, the finance minister, and Zhou Xiaochuan, the governor of the central bank, would not attend meetings this week in Washington of the International Monetary Fund and World Bank, and so would be unavailable for the gathering of policy makers of the Group of 7 industrial nations that begins Friday.
“China is manipulating its currency and taking a sledgehammer to manufacturers in the U.S. and Europe,” Senator Lindsey Graham, a South Carolina Republican who is co-sponsoring the tariff legislation, said in an interview. “So far, our response has been tepid. China’s currency is undervalued and needs to be adjusted.”
Now let’s take a look at something different. Is natural gas different enough? I thought so!
Check out more of today’s insanity: Bill targets natural gas speculation Legislation designed to limit natural gas speculation was introduced Thursday by U.S. Rep. Sam Graves, R-Mo, and U.S. Rep. John Barrow, D-Ga.
The Graves/Barrow bill would set up daily 8% limits on how much natural gas futures contracts can fluctuate in price. It would also require the CFTC to draw up rules for large position reporting and cash settlements of natural gas contracts. The bill will probably be sent to the Agriculture Committee. Graves and Barrow are members of that committee.
Is this unbelievable or what? Are there any Republicans left in Congress? Are we going to bring back wage and price controls? Is this wage and price controls and WIN (Whip Inflation Now Part II?) We have bills sponsored by Republicans to protect tackle box manufactures (discussed in one of my earlier free trade pieces), we have a FED that sets interest rates rather than the market, and now we have attempt to control the daily price swings of natural gas, sponsored by both republicans and democrats.
Are we reverting to China’s Command and Control economy as them move closer to ours? Is anyone still confident that tariffs are saber rattling bluffs as opposed to blatant stupidity? Is any of this legislation going to serve the stated purpose? If someone thinks so, please tell me how.
These bills may not guarantee deflation, but they are guaranteed to make the upcoming deflation and credit crunch worse.