Thursday, March 14, 2019

How Joe Biden helped spark the Global Financial Crash of 2007-2008

As a Senator from Delaware, Joe Biden was one of the major promoters of the Bankruptcy Abuse and Consumer Protection Act of 2005 (BACPA).

Written by banks and credit card companies being swamped by rapidly rising rates of personal bankruptcy in the early 2000s, BACPA made it much more difficult for individuals to enter formal bankruptcy.

Not surprisingly, it did not occur to American financial and political elites, like Senator Joe Biden, that simply making it more difficult for individuals to declare bankruptcy did absolutely zilch to solve the economic hard times suffered by people who are bankrupt.

So, what do you think people in financial straits did when they can no longer file for bankruptcy?

Yep, folks, lots of them stopped paying their home mortgages. This was especially noticeable at the time for subprime mortgages.

And what did the problems in subprime mortgages cause?

Well, it blew out these fancy financial derivatives based on mortgage loans, called credit default swaps.

And the collapse of credit default swaps brought down Bear Stearns in March 2008, which was followed in September 2008 by the collapses of Fannie Mae, Freddie Mac, Lehman Brothers, and AIG. And it was all downhill from there for the rest of the world economy.

I know, I know, you probably have never before heard that the 2005 BACPA bankruptcy reform is really what led to the 2007-2008 Global Financial Crisis. So, don’t take my word for it. Lend an ear to the good folks at the Federal Reserve Bank of New York.

Federal Reserve Bank of New York Staff Reports, "Seismic Effects of the Bankruptcy Reform" Staff Report No. 358, November 2008, Revised February 2009:
"We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage."
Liberty Street Economics, blog by Federal Reserve Bank of New York, “Insolvency after the 2005 Bankruptcy Reform”:
Taken together, these findings suggest that the 2005 bankruptcy reform was associated with a large and persistent reduction in bankruptcy filings and a rise in insolvency and foreclosures, concentrated primarily among low-income individuals in court districts with the largest increases in filing costs.
It was an article on Politico a couple days ago that revealed Joe Biden’s key role as Senator in getting the 2005 BACPA bankruptcy reform passed. The article is entitled, “Inside Biden and Warren's Yearslong Feud” and focuses on the confrontation between then Senator Biden, and then Harvard Law professor Elizabeth Biden, in a February 2005 Senate hearing.
….But Biden had what he called a “philosophic question,” according to the Congressional Record’s transcript of the hearing that day: Who was responsible? Were the rising number of people who filed for bankruptcy each year taking advantage of their creditors by trying to escape their debts? Or were credit card companies and other lenders taking advantage of an increasingly squeezed middle class?

Warren blamed the lenders. Many credit card companies charged so much in fees and interest that they weren’t losing money when some of their customers went bankrupt, she said. “That is, they have squeezed enough out of these families in interest and fees and payments that never paid down principal,” Warren said. 
Biden parried. “Maybe we should talk about usury rates, then,” he replied. “Maybe that is what we should be talking about, not bankruptcy.” 
“Senator, I will be the first. Invite me.” 
As the bill neared passage, Sen. Orrin Hatch (R-Utah), who had championed the bill, made a point of thanking Biden for his support. Biden and Tom Carper, the other Democratic senator from Delaware, “have worked tirelessly for years on this legislation, and they have taken some tough votes to get it done,” Hatch said on the Senate floor.
Warren had been recruited to serve as an adviser to a commission whose members were appointed by Bill Clinton, Congress and Supreme Court Chief Justice William Rehnquist that studied the country’s bankruptcy laws. The commission issued its report a month after Boucher and McCollum introduced their bill, and many of its recommendations ran counter to what the congressmen proposed. As the legislation that would become the bankruptcy bill started gaining support, Warren pushed back against the idea that the rising bankruptcy rate was a problem.
The great untold story of the 2005 BACPA bankruptcy reform is that households which became unable to file for bankruptcy under BACPA began defaulting on their home mortgages leading two years later to the Great Financial Crash of 2007-2008.

If Politico's writers and editors had any chops, they would have asked Biden if he accepted responsibility for helping melt down the world economy twelve years ago.

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