Can Anything Save Us from Unintended Consequences?

STUART VYSE

Stuart Vyse is a psychologist and author of Believing in Magic: The Psychology of Superstition which won the William James Book Award of the American Psychological Association. He is a fellow of the Committee for Skeptical Inquiry.

Quick quiz: What caused the Great Recession of 2008?

OK, I admit it. That’s an unfair question. It was complicated. If you’ve done some homework, you might be able to mumble something about a housing bubble, subprime lending, mortgage-backed securities, credit-default swaps, big banks, irresponsible borrowers, George W. Bush, Barack Obama….

But there is one thing I can be fairly certain you will not mention: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). You may not have heard of BAPCPA or, if you have, it may only be a foggy memory. So, here is a little history:

In the 1990s, personal bankruptcies were rising sharply, and the banking industry began a lobbying campaign to stiffen the bankruptcy requirements—a move that was expected to increase the profits of credit card companies. Attempts to pass a bill failed until President George W. Bush was reelected in 2004. Finally, after big banks spent $40 million in campaign contributions and millions more in lobbying efforts, the bill went into effect in late 2005 (Labaton 2005). It had a number of provisions, but most importantly it increased the up-front costs of filing for bankruptcy and made the process more onerous.

Figure 1. Nonbusiness (personal) bankruptcies and percentage of homes in foreclosure (right-hand axis) for the years 1990–2016. The vertical line marks the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Sources: U.S. Courts and Mortgage Bankers Association.

Of course, people should pay their bills. We all should live up to our responsibilities. But, as President Obama was fond of saying, America is a nation of second chances (Obama 2016). Bankruptcy is designed to give people a “fresh start,” a chance to right their financial ships. Furthermore, it often works as intended. While writing a book about the psychology of spending and debt, I met a number of people who went through bankruptcy and were able to get their lives back on course. However, the money written off in bankruptcy cuts into the profits of credit card companies and other lenders and keeps interest rates high; so the banks lobbied to make the bankruptcy requirements more difficult. Little did they know what would happen next.

Although it took a few years to figure out, several economic studies now conclude that the BAPCPA was a precipitating factor in the ensuing debacle of 2008 (Albanesi and Nosal 2016; Li et al. 2011; Morgan et al. 2012). According to these investigations, once the new bankruptcy requirements went into effect, many people who were struggling with debt found bankruptcy was no longer an option. Ironically, they could no longer afford to declare bankruptcy. But what remained an option was not paying the bills, and beginning in 2007, a little over a year after BAPCPA went into effect, an increasing number of homeowners chose to stop paying the biggest bill of all—the mortgage. The switch from bankruptcies to foreclosures can be seen in Figure 1.