Thursday, April 21, 2005

Bushisms Mark II, #1

by Tom Bozzo

I've seen some conservative bloggers complain about the declining amusement quality of Bush II's assault on the language. Fair enough. I'll suggest instead going after the content of the non-mangled statements.

From Bush's remarks at yesterday's bankruptcy bill signing:
"Bankruptcy should always be a last resort in our legal system," Bush said. "If someone does not pay his or her debts, the rest of society ends up paying them."
The first sentence, I basically agree with, though I'm at a loss as to the Bush policy contribution to making bankruptcy legal but rare.

Spot the fundamental conceptual error(s) in the second.
I notice a missing comma after debts, but otherwise I am totally missing the problem. Does paying "them" refer to someone or the debts?

Still confused..
Bryan, you're right about the comma -- cut and paste error, sorry.

As for the problem, note that the price of credit is based in part on default risk. Consider, then, who really pays the debts.
Tom, sorry, I feel dumb about this, but why wouldn't the cost of higher credit be spread by consumer lenders to consumer borrowers? Isn't that what Bush is saying?
... I mean higher credit cost...
Oscar, the issue is that, through risk-based prices, creditors shift (at least some of) the expected cost of default onto the high-risk borrowers themselves (the higher credit costs serving as a sort of insurance premium), rather than to all borrowers or to "society as a whole." Note that there's a value to that insurance in that a debtor should be willing to pay some premium to avoid debt peonage in the event of hard times. Whether what creditors actually make them pay is fair is another matter.

In any event (as with Bush Social Security "reform") there's a shift of risk from institutions to individuals. Whether that shift is warranted depends on what one thinks of the relative role of external adverse events and personal iniquity in triggering bankruptcy.

There's relatively little upside for low-risk borrowers because they already pay low rates in accordance with their default risk (i.e., a low risk premium).
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