Copyright (c) 2009 All rights reserved. http://works.bepress.com/todd_zywicki Recent documents in Todd J. Zywicki en-us Mon, 05 Jan 2009 14:00:07 PST 3600 http://works.bepress.com/todd_zywicki/3 http://works.bepress.com/todd_zywicki/3 Thu, 20 Mar 2008 12:14:58 PDT From 1980 to 2005 consumer bankruptcy filings increased five-fold. Conventional wisdom holds that a primary cause of rising bankruptcy filing rates was increased household financial distress caused by increased indebtedness caused in turn by increased credit card borrowing. In 2005, Congress enacted the bipartisan Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The legislation was enacted in response to twenty-five years of rising bankruptcy filings and a perception of widespread fraud and abuse that threatened the fairness and integrity of the system. BAPCPA marked the most profound and far-reaching overhaul of America's bankruptcy system in over a generation. In the two years since BAPCPA's enactment, bankruptcy filings have plunged. From over 2 million filings in 2005, filings plummeted to less than 600,000 in 2006 and 800,000 in 2007.Critics of the legislation argue that the drop in filings will be temporary, as the legislation does not address what they believe to be the underlying cause of the rise in bankruptcy filings in the 1980s and 1990s--excessive consumer debt caused by profligate lending by credit card issuers especially to risky borrowers. This article reviews three hypotheses about the relationship between credit cards and bankruptcy: the substitution model, the "distress" or "overindebtedness model," and the "strategic model" and concludes that the conventional wisdom is flawed. A review of empirical evidence and available data indicates that in fact the growth in credit card lending has not led to an increase in the consumer debt service ratio or financial distress more generally, suggesting that the rise in credit card borrowing has been primarily a substitution from other traditional types of consumer credit, such as retail store credit, personal finance companies, friends and family, pawnbrokers, and other types of consumer credit.The article then briefly examines the substitution hypothesis in more depth, describing how a substitution to credit card debt can bring about a rise in consumer bankruptcy filings even holding overall consumer debt obligations constant. Finally, the article examines the rationale and effects of the credit card provisions of BAPCPA for the substitution and distress models. To date, the response of consumers to BAPCPA has been consistent with the substitution model, suggesting that with respect to addressing particular problems regarding the relationship between credit cards and bankruptcy BAPCPA has been accomplishing its stated purposes. Todd J. Zywicki Banking and Finance Bankruptcy Law Consumer Protection Law Law and Economics http://works.bepress.com/todd_zywicki/2 http://works.bepress.com/todd_zywicki/2 Fri, 07 Mar 2008 09:22:12 PST The collapse of the subprime mortgage market has led to calls for greater regulation to protect homeowners from unwittingly trapping themselves in high-cost loans that lead to foreclosure, bankruptcy, or other financial problems. Weighed against this catastrophe are the benefits that have accrued to millions of American families who have been able to become homeowners who otherwise would not have access to mortgage credit. Although the bust of the subprime mortgage market has resulted in high levels of foreclosures and even problems on Wall Street, the boom generated unprecedented levels of homeownership, especially among young, low-income, and minority borrowers, putting them on a road to economic comfort and stability. Sensible regulation of subprime lending should seek to curb abusive practices while preserving these benefits.This article reviews the theories and evidence regarding the causes of the turmoil in the subprime market. It then turns to the question of the rising foreclosures in that market in order to understand the causes of rising foreclosures. In particular, we examine the competing models of home foreclosures that have been developed in the economics literature--the "distress" model and the "option" model. Establishing a correct model of the causes of foreclosure in the subprime market is necessary for sensible and effective policy responses to the problem. Finally, we review some of the policy initiatives that have been suggested in response to the crisis in the subprime market. Because new regulatory interventions will have costs as well as benefits, until the causes of the market's problems are better understood it may be that the best policy in the short-term is to do little until well-tailored regulatory approaches are available. Todd J. Zywicki Law and Economics Commercial Law Bankruptcy Law Economics Law and Society Banking and Finance Consumer Protection Law http://works.bepress.com/todd_zywicki/1 http://works.bepress.com/todd_zywicki/1 Fri, 23 Feb 2007 11:40:44 PST This Essay examines Richard Posner's critique of F.A. Hayek's legal theory and contrasts the two thinkers' very different views of the nature of law, knowledge, and the rule of law. Posner conceives of law as a series of disparate rules and as purposive. He believes that a judge should examine an individual rule and come to a conclusion about whether the rule is the most efficient available. Hayek, on the other hand, conceives of law as a purpose-independent set of legal rules bound within a larger social order. Further, Posner, as a legal positivist, views law as an order consciously made through the efforts of judges and legislators. Hayek, however, views law as a spontaneous order that arises out of human action but not from human design. For Hayek, law as a spontaneous order--of which the best example is the common law--contains and transmits knowledge that no one person or committee could ever know, and thus regulates society better than a person or committee could. This limits the success of judges in consciously creating legal rules because a judge will be limited in the forethought necessary to connect a rule to other legal and non-legal rules and what Hayek termed "the knowledge of particular circumstances of time and place."This Essay also explores Posner's argument that Hayek misunderstood the "rule of law" as the "rule of good law." Contrary to Posner, in the view Hayek came to espouse in his later work, the common law embodies the rule of law in a way that positivist creations of law do not. When judges consciously make law it is those human actors, not the "law" as such, that "rule." When law arises out of a spontaneous order, however, it is the law that rules. Judges merely articulate it. Posner does not distinguish between these two processes, and therefore sees a difference between the "rule of law" and the "rule of good law" which Hayek does not. This is because for Hayek the "rule of law" is only meaningful in a liberal society where law arises out of a spontaneous order. Todd J. Zywicki Judges Jurisprudence Law and Economics