Until now, the middle class has maintained itself on borrowed money: charge cards, store credit cards, overdraft protection, and lines of credit (including home equity LoC). Between 1980 and 2004, total outstanding consumer credit in the US rose from $360 billion to $2.1 trillion.
So far, interest rates have risen only slowly, and so the economy has slowed but not stalled. As a result, the housing bubble has tended to stabilize rather than pop.
However, I fear that the longer the US Federal Reserve forestalls what I'm going to call the Great Foreclosure, the worse it will be when it finally hits. (Then again, I am a perpetual bear, so take my economic alarmism with a grain of salt.)
One of the less-reported news items of the past couple of years is that the Republican US Congress changed US bankruptcy law effective October, 2005. The new law, drafted with lots of input from the credit card industry, requires debtors who declare bankruptcy to pay back a higher portion of their debts.
Previously, 70 percent of debtors filed for bankruptcy under Chapter 7 of the law, which canceled unsecured debts like credit card bills. Under the new law, debtors will have to take a "means test" to be eligible for Chapter 7 protection. The result is that more people will file under Chapter 13, which makes all debt repayable and holds the debtor in bankruptcy for five years.
Judges are not happy with the new law, according to an article in In These Times.
"Unquestionably, this is the most poorly written piece of legislation that I or anyone else has ever seen," says U.S. Bankruptcy Judge Keith M. Lundin, who has overseen cases in Tennessee since 1977. "No one has ever seen a piece of garbage like this," he adds.
Kenneth N. Klee, a law professor and former head of the National Bankruptcy Conference, pointed out that the previous overhaul of the bankruptcy law in 1977 was "analyzed line by line on a bipartisan basis," but added:
This time, and I say this as a Republican, [Congress] paid a lot more heed to the credit industry and other moneyed interests. ... They ran it by the people who paid $100 million in lobbying fees to get this through.
I worry that if and when the Great Foreclosure does happen, it will establish the makings of a new caste of involuntary servitude.
It won't be called "involuntary servitude", of course, and the usual apologists will bitterly denounce anyone who tries to suggest a comparison, but consider: hundreds of thousands of people living for five years in bankruptcy "protection", their income and spending managed for them by a trustee who skims the top off their earnings and forces them to scrape by on what's left after the creditors are paid.
They won't be able to buy large capital assets like houses or consumer durables (unless the house is worth more than a million dollars - naturally, there are loopholes for the rich) or even make charitable donations. They'll have difficulty changing jobs, moving, or going back to school until the debt is paid.
During the 20th century, cheap, abundant energy eliminated the need for indentured servants, sharecroppers, slaves, and the like. As that cheap energy dries up, we can expect the re-emergence of various flavours of servitude, and the new bankruptcy law is the first step down that road.
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