I enjoy observing the evolution of the economy, but we should name the new animals that have been created.
Modern bankruptcy laws were implemented in 1898 after literally hundreds of years of experience proved that debtor’s prisons were ineffective. After all, if someone has no money putting them in prison simply eliminated the opportunity for them to make money to repay their debts. Since then, businesses have been trying to eliminate the opportunity for individuals to get out of debt, though they have never come up with a solution to most debtor’s major problem: lack of money.
The 2005 revision to the bankruptcy law tried to make sure people would try to repay debt. One section of it eliminated the opportunity for bankruptcy courts to modify “mortgages on primary residences by placing the portion above the market value of the house on par with other unsecured debts.” The logic in 2005 was that the financial companies that owned the mortgages would be better at judging whether to modify them than a bankruptcy judge. In 2009, we have some reason to doubt the judgment of finance companies.
In any case, I’ve never understood how banks could justify removing bankruptcy protection for primary residences while leaving it for second homes and investment properties. … When enacted, this clearly encouraged individuals to undertake moral hazard by gambling with the bank’s money on vacation homes and investment properties. It actually did this in practice (along with a lot of other distorting factors) as 1/3 of homes sold in 2005 were second or vacation homes. These vacation and second homes represent the majority of excess housing in the United States.
Worse, making primary residences a unique class of assets distorts the system and slows down the “creative destruction” that is key to renewal of an economic system. The questions this note addresses are:
1. “What is the rationale behind continuing this distortion?”
2. “What should this rationale to be called?”
This could simply be a distortion to benefit financial companies which could be called Bankism, the preference of banks and other financial companies over other interests. This is certainly prevalent in today’s government with preference for financial institutions’ interests over those of taxpayers.
However, the recent refusal by the Senate to repeal this distortion
may indicate that it is part of a larger trend to favor business (and managers) over the interests of private individuals. The net result of the primary residence exclusion is to favor ownership by business over ownership by individuals. After all, the current rule holds the individual 100% responsible for paying too much for his home and eliminates the ability of the bankruptcy judge to hold the bank at least partly responsible for lending more than the home was worth.
What do you call favoring business ownership over private ownership? If Capitalism is the private ownership of property and Socialism is the state ownership of property, is tilting the rules of ownership of property in favor of business “Business Socialism”, “Business Capitalism” or something new like “Businessism”?