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Did credit card banks, Biden help wreck US economy?

"An unintended consequence" of the 2005 bankruptcy law reform, which was supposed to shore up credit card banks, was to boost home-loan defaults, argue economists in a Federal Reserve paper

"The US bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession," say Wenli Li, Michelle J. White and Ning Zhu, in a paper published today by the Federal Reserve Bank of Philadelphia. Link here.

In the past, "homeowners in financial distress" would "use bankruptcy to avoid losing their homes, since filing allows them to shift funds from paying other debts" so they could better continue paying their home loans.

But the "major reform of US bankruptcy law in 2005," pushed by Delaware-based MBNA Corp. and other big credit card lenders and passed after years of struggle after then-Sen. Joe Biden, D-Del., led banker-friendly Democrats in compromising with Republicans to pass the bill, limited homeowners' ability to push off card debt. Biden has said he supported the bill and made its passage possible only after Republicans agreed to ease some terms.

"An unintendend consequence of the reform was to cause mortgage default rates to rise," the authors found. "Crunching data from millions of loans, they found "prime and subprime mortgage default rates rose by 14 and 15%, respctively, after bankruptcy reform....

"They calculate that bankruptcy reform caused the number of mortgage defaults to increase by around 200,000 per year even before the start of the financial crisis, suggesting that the reform increased the severity of the crisis when it came."