Monday, March 28, 2005

Posner on The Bankruptcy Reform Act

I quote The Becker-Posner Blog: The Bankruptcy Reform Act--Posner:
Critics say that more than half of all individual bankrupts are not reckless borrowers but rather are unfortunate people who have been hit by unexpected medical expenses. But this ignores the fact that whether one is forced into bankruptcy by a medical expense (or by an interruption of employment as a result of a medical problem) depends on one's other borrowing. If one is already borrowed to the hilt, an unexpected medical expense may indeed force one over the edge. But knowing that medical expenses are a risk in our society, prudent people avoid loading themselves to the hilt with nonmedical debt.
Some will also say that those "unexpected medical expenses" include things like gambling. This says that's true, but it doesn't make a difference. "About 2.5% families described the costs of dealing with addiction and 1.2% reported uncontrolled gambling."

Posner's remark reminds me of the PHB telling Dilbert to account for unforeseen problems. Dilbert responds that unforeseen problems, by definition, cannot be accounted for. It's true that it's prudent to hoard a little in case of emergency, but it's unclear how much is the right amount. I could live as though another Great Depression were upon us, spending the bare minimum to live, saving everything for a possible catastrophe. At the end of my life, I will have enjoyed none of what I earned. On the other end of the living-in-fear spectrum, I could spend everything I earn as soon as possible, go into debt as much as possible, and generally live as if there is no tomorrow. Somewhere in between is prudence.

Even living the Great Depression, a medical disaster could leave my finances demolished. Living prudently is no guarantee of solvency. Where on the continuum you put the "living prudently" line is arbitrary. With the new bankruptcy laws proposed, it may be that "living prudently" will move closer to "living in the Great Depression."
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