Rent-Seeking Behavior Pays Off

The nation’s major lenders (esp. the big credit card issuers and auto finance companies) will reap significant returns on the investments that they have made in the form of campaign contributions to members of Congress (particularly Republicans). In return for a few million dollars in contributions, lenders are being rewarded with passage of the bankruptcy bill:

WASHINGTON, March 8 – The Senate assured final passage of the first major overhaul of the nation’s bankruptcy laws in 27 years on Tuesday, when it took two votes that cleared the remaining political obstacles to a measure that the nation’s credit and retail industries have sought for years.

The bill would disqualify many families from taking advantage of the more generous provisions of the current bankruptcy code that permit them to extinguish their debts for a “fresh start.” It would also impose significant new costs on those seeking bankruptcy protection and give lenders and businesses new legal tools for recovering debts.

The finance industry is not in particular trouble, and personal bankruptcies are not threatening the profitability of lenders. Capital One Financial earned about $1.5 bn in profits in 2004, MBNA will earn over $2 bn in profits in 2004, and American Express earned about $3.5 bn in profits in 2004, to give just a few examples of the major beneficiaries of the bankruptcy reform bill.

The bankruptcy system does get abused from time to time, particularly by wealthy individuals who are able to shield their assets from bankruptcy court; but as Krugman pointed out in his column yesterday, the Senate specifically rejected efforts to address the problem of high-income bankruptcy abusers. Instead, as I’ve described earlier, the new law will just make it easier for creditors to squeeze more money from low-income debtors.

There’s no economic justification for this new law, no social justification for this new law, no major existing problem that this new law will solve. The law is simply the result of lobbying efforts by one particular industry to enact legislative changes that will increase their profits. That fits my definition of rent-seeking behavior.