How A 2005 Law to Prevent Bankruptcies Led to the 2008 Recession

[CentralMass]

Link to the bill including the roll call vote. https://www.congress.gov/bill/109th-congress/senate-bill/256/text
Of note then Vermont Representative Bernie Sanders voted against the bill

Also of note is that then Professor Elizabeth Warren was one of the bills most vocal opponent's. Here is a link containing her testimony on it
before the Senate Judiciary Committee February 10, 2005 in opposition to the bill. https://www.scribnerbankruptcyblog.com/2011/03/blast-from-the-past-elizabeth-warren-on-bapcpa.shtml

Also of note then Senator Joe Biden voted for and championrd the bill. I'll leave that to google it yourself.

The article and subject matter is wonky. At a very high level the bill made it harder for people of limited neans to file for chapter 7 bankruptcy . It was instrumental in more oeople losing their homes during the subprime loan crisis where as they may have been able to stay in them prior to the bills passing. It also prevents people with crippling student debt to seek relief through bankruptcy.

Link to the article quoted below. https://www.thebalance.com/bankruptcy-abuse-prevention-and-consumer-protection-act-3305555

How the Act Led to the 2008 Recession

"A report by the National Bureau of Economic Research said that the Consumer Protection Act could have helped cause the subprime mortgage crisis and the subsequent Great Recession. How? The law made it difficult to declare bankruptcy.

There are three advantages of bankruptcy. First, those in debt could hold off the collection efforts of creditors. Second, they could have unsecured debts simply written off. Third, they could get their debt reorganized and interest payments reduced on secured loans.

Before the 2005 law, homeowners could declare bankruptcy on their personal debt. It freed up funds to pay their mortgages and save their homes. With bankruptcy ruled out, homeowners were forced to use their home equity to pay bills.

First, homeowners were forced to take equity out of their homes to pay back their debts. Before the Act was passed, the home was protected from creditors, even under bankruptcy. Homeowners could declare bankruptcy on their personal debt, freeing up funds to pay their mortgages and save their homes.

After the Act, people became more desperate to pay bills. Mortgage defaults rose 14 percent. In addition, 200,000 more families lost their homes, each year after the Act was passed.

Second, people became enslaved by the cost of health care. The Bush administration responded to the request of banks who said consumers were abusing bankruptcy to just avoid paying their bills. But medical costs created the most bankruptcies. When the Act prevented bankruptcy, those with chronic illnesses were forced deplete all their assets to pay their medical bills.

That is supported by earlier data. In the three months before the Act was passed, there were 667,431 bankruptcies in the fourth quarter of 2005. This plummeted to 116,771 in the first quarter of 2006. It was just 155,833 in the second quarter.

Despite the law, the 2008 Financial Crisis sent bankruptcies skyrocketing. In the second quarter 2009, 381,073 people were forced into bankruptcy. By then, homeowners could no longer rely on home equity to pay their bills. They lost their home, and still had to declare bankruptcy. Such a dramatic increase in such a short period of time shows how many families folded in the face of unsustainable debt.

Higher bankruptcies couldn't have come at a worse time for the economy. Vendors who no longer received payments eventually went bankrupt themselves. That created more unemployment. Although families who received bankruptcy protection were temporarily saved from crushing debt, it stayed on their credit report for 10 years. That prevented them from buying a house or obtaining credit. Both trends prolonged the housing crisis and recession."

[rampartc]

1. this law did not receive enough attention when it passed

but it is one of the reasons i support sen sanders and sen warren.

the bill should have focused on the corporate bankruptcies which have always been tools to rob retirees, employees, consumers, and creditors.

[shanny]

2. That bill was a disaster for everyone--

except banks.

[Celerity]

30. +10000

[Uncle Joe]

3. Kicked and recommended.

Thanks for the thread CentralMass.

[workinclasszero]

4. K&R

[BlueFlorida]

5. The law didn't cause the recession

That is a false charge.

The law made it worse for some people to recover from the recession. That part is correct.

[CentralMass]

6. The article that I sited is an opinion piece, a very good one IMO with solid facts to back it.

This bill was a gift to the predatory lending and financial institutions to cover the asses from the impending crisis of their own making.

[BlueFlorida]

7. It is from a supporter's blog

and is dripping with bias.

[CentralMass]

8. Well it has some basic facts that are very true. However explain to me

how this bill was anything less then a gift to morally bankrupt predatory lenders to cover their asses from the impending crisis caused by their own irresponsible predatory practices why giving the shaft to to the american people.

This started with the deregulation of the savings and loan industry during the Reagan administration got worse the trepeal of Glass'Stegall act during the Clinton adminstration and this bill during Bush's administration that was a swift kick in the ass to the american people.
Followed by TARP where we bailed out their crooked asses instead of the people.

[BlueFlorida]

14. Restricting bankruptcy by laws doesn't cause recessions

That is an amusing way to look at it.

Do you think if they abolished all ways of declaring bankruptcy, it would case a massive recession or even a depression?

[Demsrule86]

42. Your candidate does not benefit from this sort of thing.

[Laura PourMeADrink]

9. Obviously you didn't listen to Obama's words today

[CentralMass]

11. That advice wasn't a singular message for your candidate of choice. Then again maybe it was.

[Celerity]

13. Obama's words were a warning of rigid, doctrinaire progressiveness, you are positing a non sequitur

Whilst I do not think the the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (which Biden was a major force behind) was the cause of the 2007-2009 financial crisis (to call it a recession is to undersell to to an extreme degree, as well over 30 TRILLION USD was wiped off the books globally) it has had a tremendously negative impact on the middle and working class. It is one of the major reasons I do not support Biden in the primaries. It has also thrown an absolute spanner into the works of millions of ex-college students, as it has made getting out from under ruinous student loan debt damn near impossible for millions of of my age (I am 23, so call it 40yo and under) cohort.

As for the actual, fundamental root causes of that horrific, global crash (also Biden supported) I present this:

These are bi-partisan in nature, and the worst of the Clintonian legacy:

1 The repeal of Glass-Steagall

On November 12, 1999, President Clinton signed the Financial Services Modernization Act (the Gramm-Leach-Bliley Act) that repealed Glass-Steagall.

On November 4, the final bill resolving the differences was passed by the Senate 90–8 and by the House 362–57. The legislation was signed into law by President Bill Clinton on November 12, 1999.

Glass Steagall Act of 1933, Its Purpose and Repeal
This 1933 Law Would Have Prevented the Financial Crisis

https://www.thebalance.com/glass-steagall-act-definition-purpose-and-repeal-3305850




2 The even more odious Commodity Futures Modernization Act of 2000, which re-legalised most OTC derivatives including credit swaps (derivatives of multiple flavours were the instruments that were so crucial to the meltdown in sub-prime mortgages).

The House passed the Conference Report and, therefore, H.R. 4577 in a vote of 292-60. The Senate passed it by unanimous consent (over the objections of Paul Wellstone and James Inofe). Clinton signed it into law on December 21, 2000.




How Congress Rushed a Bill that Helped Bring the Economy to Its Knees

https://www.huffpost.com/entry/how-congress-rushed-a-bil_b_181926




Great video about Brooksley Born, who trying to warn about this, and was completely shut down by Lawrence Summers, Robert Rubin, et. al

The Warning

Long before the economic meltdown, one woman tried to warn about the threat to the financial system...

https://www.pbs.org/video/frontline-the-warning/

[BlueFlorida]

15. It is the height of unfairness to pin any of those on Biden

At the time those acts were passed, there were no NINJA loans and no investments by consumer and commercial banks in equities and bonds.

That happened under GW BUsh and Greenspan.

Blaming Biden for the financial crisis because he was one of the 98 senators who supported it is unfair at best and grossly malicious at worst.

At the time the bankruptcy reform was passed, there were severe Bankruptcy abuses taking place where whole families would go on luxurious vacations on credit cards and then declare bankruptcy, sometimes doing it every seven years. All that act did was allowed banks to have the spending reviewed in a court. Legitimate bankruptcies still went through and are still going through.

What is forgotten is the fact that railing against banks and corporations only means whatever money they lose, they'll have to just accept it. In reality, banks will never reduce their profits -- they will just sock it to their other customers and maintain their profits. Thus those who don't declare bankruptcy pay for the credit cards of those who do.

[Celerity]

16. I never said he was the sole reason, but he did help champions the 2005 Bill through congress

from the Democratic side. You also try to misrepresent the that Act by putting up ludicrous RW-framed examples, straight of the 'welfare-queen''style play book.

So nope, not buying what you are selling. The 2005 Act was disastrous for millions and an perfect example of the horrific side of bipartisanship when its is framed through a corporatist lens.

Legitimate bankruptcies still went through and are still going through.

Is a flat out falsehood.

to quote the article I linked to

In light of what occurred in its wake, this law is easily one of the most disgraceful aspects of the Bush and Biden legacies. The harm it did to middle-class Americans, especially during the crushing events of the recession four years later, is immeasurable. The bill made it nearly impossible for average families to file Chapter 7 bankruptcy protection, also known as "clean slate" bankruptcies intended to discharge nearly all debts, a matter of a few years before they'd need it the most. The bill instituted an all new means test to determine whether debtors with insurmountable financial hardships earned enough income to pay back all or part of their unsecured debts, specifically credit debt. If they earned too much, a clean slate bankruptcy became impossible, and they'd be forced to file Chapter 13, which would force debtors to pay back their debt over a five-year timeline, thus legalizing neo-indentured-servitude to creditors.

[Demsrule86]

41. The deregulation of banks during the Bush years and tax cuts, two wars....all

Contrbuted to 2008....Bush had been in office eight years by then.

[crazytown]

20. The question is

could WJC have successfully vetoed that legislation? The money and momentum behind them was staggering.

[Celerity]

21. Why would he have vetoed it? He thought is was the correct move.

Disastrously so.

[Laura PourMeADrink]

24. Like Biden said, it affected 10% of the population. It's

Strange to believe that Democrats orchestrated a crash.
And to me, it's naive to think banks can just eat losses ad infinitum.

[Celerity]

25. that literally makes zeros sense

A every level. You are arguing for a policy that has trashed millions of Americans and claiming the the banks are victims. Sounds like a winner of a 2020 campaign platform.

NOT

But thanks for playing.

[Laura PourMeADrink]

26. Bullshit. It is naive to the nth degree that most all banks

don't survive to provide a service and to earn a profit. It is also naive to believe that there wasn't a time when there wasn't abuse of the bankruptcy laws. That is NOT to say a good government shouldn't provide a safety net for those in need. It should !!!

Who are you for? Suggest you spend a fraction of the time you spent grasping at straws to try and defame a potential nominee and use it to highlight that person.

[Celerity]

28. like I said, keep on rolling with that tosh that the banks were victims and needed that law

to survive. The Bankruptcy Abuse Prevention and Consumer Protection Act or 2005 has been a disaster for a staggering number of our fellow citizens. Whilst you are at it, defend the disastrous repeal of Glass Steagall and the even worse re-legalising of most derivatives under the Commodity Futures Modernization Act of 2000 that DIRECTLY led to the global financial crisis of 2007-2009.

You calling my critique of those rapacious and disastrous bills as grasping at straws is not just factually ludicrous, it is politically suicidal as well if you try and posit that into a poltical platform for a run in 2020.

You say I am defaming a potential nominee, but all I am doing is calling out actual votes and legislative procedural actions and their repercussions. It is an absolutely fair part of the vetting process. So sorry you feel that highlighting that is defamation, as it is most certainly not. Apparently you are not even familiar with the actual definition of the word 'defame' ie. defamation. Let me help you out.

https://en.wikipedia.org/wiki/Defamation

Defamation, calumny, vilification, or traducement is the communication of a false statement that harms the reputation of, depending on the law of the country, an individual, business, product, group, government, religion, or nation.

Under common law, to constitute defamation, a claim must generally be false and must have been made to someone other than the person defamed.

Absolutely zero what I said was false, as much as you may wish it was. Own it.

[Laura PourMeADrink]

31. Blah, blah, blah. Volume of words does not make

up for lack of effort in defending who you like. Write a post defending your choice!!!

[Celerity]

33. I have put up plenty of OP's defending policies, philosophies, issues, and candidates that I admire

cheers

[Laura PourMeADrink]

35. Great!!!

[Demsrule86]

40. It is painfully obvious what your motivation may be. Why not tout

Your candidates accomplishments instead...I am sure he must have some.

[KayF]

18. Obama's words had nothing do do with this

Obama did NOT say "Don't discuss substantive matters during the Democratic primaries. Don't discuss major legislation that a candidate had a lead role in passing, and its relation to the greatest financial crisis in most people's lifetime, which occurred just ten years ago."

[corbettkroehler]

10. Bottom Line: Sanders And Warren Vehemently Opposed It (n/t)

To those Sanders cynics, I cry: don't give me that line of guff that Bernie isn't a Democrat when plenty of card-carrying Democrats voted "aye" on that disastrous legislation.

[Demsrule86]

39. Bernie is not a Democrat. And was Warren in the Senate then? I do believe Ted Kennedy was

In the senate.

[corbettkroehler]

44. At That Time, Warren Was A Recognized Public Figure

That's part of why Obama chose her to help with TARP and then the CFPB.

Question: if Bernie is not a Democrat, why does DU have a topic area for him listed under "Democrats 2020"?

[Drunken Irishman]

12. This is disingenuous at best.

Anyone who believes a bill that became law in mid-2005 is the cause of a recession roughly a year and a half later doesn't know how the economy works. You could argue it didn't help after the recession hit but, beyond an act of war, no law is going to be that impacting in such a short amount of time.

[BlueFlorida]

17. This is probably a new communique from some mothership

energizing all faithful to start a new smear campaign.

It is ridiculously obvious.

[Laura PourMeADrink]

27. Love you BF

[KayF]

19. that seems like a short time

Last edited Sat Apr 6, 2019, 07:52 PM - Edit history (1)

I'm no economist, but I would be more persuaded by an argument that it would take longer for legislation to have this kind of impact.

oops that's what you said.

[Drunken Irishman]

22. It's a trickle...

Reagan's economic agenda wasn't entirely felt until the late 80s, early 90s, when the US was plunged into recession well after his presidency had ended. it was delayed, though, since it's very unlikely legislation can take effect that quickly. The person who got the blame, though, was Bush - not Reagan - because his presidency had ended by that point.

That delay killed Bush's reelection chances. Ironically, though, that same delay is just as much prevalent in combating a recession as it is starting one. Bush broke his 'no new taxes' pledge early in his presidency as he compromised with Democrats and raised taxes, which some economists believed helped pull the US out of the recession. Except that was delayed, too, as Bush signed the Omnibus Budget Reconciliation Act of 1990 in November, 1990, but the ending of the recession wasn't entirely realized, or at least felt, until three-to-four years later, when Clinton was already into his presidency, one he largely won because of economic conditions during the 1992 presidential election. Ironically, the recession actually technically ended in June, 1992. But the damage would carry for multiple years.

Legislation takes time. Especially something of this magnitude. The 2007 recession was built out of many things - the lack of overall growth coming out of the early 00s recession, the bubble economics that dominated the 90s and 00s, including the housing bubble and, of course, the subprime mortgage crisis. A great deal of the subprime mortgage crisis was due to housing prices dipping moderately in 2006 (shortly after this bill was signed) and higher interest rates (which is not tied to any of this), which made it impossible for many homeowners to refinance their houses. It's too simplistic to just point to one reason for the Great Recession. It was a perfect storm.

There was predatory lending. Overbuilding. Lack of regulation. Government relaxing rules so just about anyone could get a mortgage and buy a house.

But no, this bill didn't trigger the Great Recession. Had it never been signed, the recession still would have happened.

[KayF]

23. sorry I misread your post

which is inexcusable because it wasn't very long.

I agree about the Bush legislation and the timing of the recession.

[LovingA2andMI]

29. The Cause Behind the '08 Financial Crisis..

Was too-easily credit, overpriced homes and zero doc mortgages running left and right.

[Laura PourMeADrink]

32. And it wasn't all banks for sure.

[WeekiWater]

34. Extremely flawed and poor analysis.

Bordering on ignorance.

That said, good on Warren and Sanders for opposing the legislation.

[ucrdem]

36. Only in Sirotaville.

Was it a good vote? Probably not. Did it cause the recession? No. Would he support it today? I doubt it but I imagine he'll be answering that question himself soon enough, probably several times a day.

[50 Shades Of Blue]

37. I've never forgotten who voted for it.

[Demsrule86]

38. So now that he touched my shoulder' didn't work, some attempt to blame him for the 2008

Recession. The banks and Bush are now cleared in order to attack Biden....scorched earth, circular firing squad rides again. It wont work.

[yardwork]

43. Don't you think that this is just a bit reductionist?

The 2008 recession was caused by Republican corruption and greed.