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[TTHQ Staff]

BEING STREET SMART
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Sy Harding


MIDDLE CLASS GETS THE SHAFT - AGAIN! APRIL 22, 2005.

Folks in financial difficulties are soon going to find it much more difficult to declare bankruptcy. This week Congress passed the most severe revision of bankruptcy laws since 1978. It will go into effect in 180 days.

On the surface it seems like a good idea. We’ve all heard of the O.J. Simpsons, and corrupt corporate chieftains who manage to declare bankruptcy to shield themselves from judgments they could otherwise be forced to pay; those who hide assets or illegally transfer property to relatives before declaring bankruptcy; and even those who could probably eventually pay off the indebtedness if they sucked it up and got at it.

But we probably also know unfortunate souls who became hopelessly indebted through accidents, major family illnesses, or small business owners dumped into a dark hole when their businesses went under through no fault of their own (perhaps the arrival of a WalMart next door, or the re-routing of a highway).

Some members of the Congressional Rules Committee were upset because they could not even get an amendment that would exclude individuals whose debt can be proved to be tied to overwhelming medical expenses. However, the bill does apply a ‘means test’ that excludes those with less than the median income in the state in which they live, making it apply mostly to the middle class.

It disturbs me, but doesn’t surprise me, that those pushing the bill were primarily finance and credit-card companies, and their lobbyists. (Opposing its passage were labor unions, women’s groups, and consumer groups).

I’d feel a bit better about it if there was at least a companion bill making it illegal for finance and credit-card companies to indiscriminately stuff mailboxes with pre-approved loan applications and credit cards, many of which reach those who might be desperate.

I’d feel better about it if the timing was different, coming just as signs are piling up that, through no fault of their own, higher gasoline prices, rising interest rates, and rising inflation are taking money out of consumers’ pockets, beginning to make it more difficult for many to meet their payments.

It bothers me some that they got themselves into this record debt under one set of bankruptcy laws, and now that the debt has been incurred the rules are changed.

But it bothers me most that consumers didn’t get into excessive debt entirely through their own disregard of risk, or foolishness. I do remember 2001 very clearly.

The stock market was already in the second year of a serious bear market. Two or three trillion dollars of investors’ savings and investments had already been wiped out in that market decline. Consumers were feeling the pinch and had begun to cut back on their spending, which had the economy slowing into recession. And then along came the calamity of the terrorist attacks on 9-11-2001. It looked like that would push the economy into a much more serious decline. Airlines were grounded, but no one wanted to fly anyway. The travel and tourist industry fell into a dark hole. Consumers retrenched into their homes, leaving shopping malls empty. Car salesmen passed their time throwing darts and playing cribbage.

Washington’s immediate response was that Americans had to show Osama bin Laden that he could not bring our economy down, or destroy our will. The president himself said that the most important thing that Americans could do was to get out and spend, that in fact it was the patriotic thing to do, as it would get the economy back on its feet and show the terrorists that they could not destroy the spirit of the American people.

To help consumers do that, tax rebates were issued, and when Washington worried that people might just stick them in their savings accounts, we were told to get out and spend them to help the economy. Interest rates were lowered to make it easier. More tax cuts came along. Everyone got into the act of convincing Americans to spend, that even going in debt to do so was the patriotic thing to do. Banks and mortgage companies, particularly the now-troubled giant government-chartered mortgage company Fannie Mae, lowered their credit standards and minimum down-payments. Consumers were encouraged to refinance their mortgages and in the process take money out of the equity in their homes. Credit-card companies offered new cards with low introductory rates, and flooded mail boxes with them. Auto companies offered zero percent financing, and rebates that could be used as down-payments.

And Washington’s plan worked. Consumers came through with flying colors. They did in fact spend the economy out of trouble.

Washington had hoped that if consumers got the thing going, corporations would step in and pick up the ball with spending of their own. But they didn’t, and consumers were left with the burden of doing it all. And they didn’t shirk their duty, even though as they spent the economy out of trouble they spent themselves into potential trouble.

And that’s what really bothers me about credit-card and finance companies pushing for, and Congress passing, severe revision of bankruptcy laws with this particular timing. As one critic put it, “It’s a serious betrayal of the middle class, with serious consequences for hurting Americans in order to help the credit-card companies.”

Yes, it excludes the poor. But unfortunately it was the middle class that responded to Washington’s assurances that they could, and should, save the economy, and ran with it. And for some of them who did the heaviest lifting, their reward is on the way.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.