Fed and FDIC Testimony on Dodd-Frank Financial Reform Legislation: Lessons Learned

Federal Reserve Chairman Ben S. Bernanke praised the new Dodd-Frank financial regulation legislation and offered a frank appraisal of his mistakes since 2006 in September 2, 2010 testimony before the Congressional Financial Crisis Inquiry Commission.

It should be noted that September 15, 2008 (just next week) marks the two-year anniversary of the bankruptcy filing of Lehman Brothers. NY Times columnist Sewell Chan notes that the Lehman failure was the “nadir”, or lowest, moment of the financial crisis.

“The Dodd-Frank legislation gives the Federal Reserve Bank oversight over the largest financial institutions, including those that are not banks (such as American International Group, or “AIG” – JHM). It gave the Fed a prominent role in the Financial Stability Oversight Council, a body of regulators with the power to seize and break up a systemically important company if it threatens economic stability. The Federal Deposit Insurance Corporation would manage that [breakup] process, known as resolution.” writes Mr. Chan.

Mr. Bernanke recounted his errors, indicating that he was wrong in 2007 when declaring that the subprime mortgage crisis could be contained and would not infect nor destabilize other parts of the financial system. Mr. Bernanke denied allegations that the Federal Reserve bank was at least partly responsible for the housing price bubble by keeping interest rates too low during the 2002-2004 period. An implication of Mr. Chan’s summary of Mr. Bernanke’s testimony before Congress appears to be that Mr. Bernanke now believes that trying try to identify a “bubble” in the economy early enough is part of the Fed’s charter. If such a “bubble” could be identified early enough to justify Fed action, the Fed could decide to increase interest rates so as to slow down the growth of the bubble.

Here is the link to the interesting NY Times, September 3, 2010 article.

Ideas for Action: Few of us have the resources and knowledge available to Mr. Bernanke. However, starting to keep a family budget, carefully monitoring your spending, and creating a savings plan for both retirement and “rainy days” are among the prudent steps that we all can take to keep financial problems from becoming too big to handle.

Is Bankruptcy the same everywhere? An Irish perspective.

Is bankruptcy the same everywhere? Let’s compare Ireland with the USA. All of the statistics that follow are from 2009 data.

– Population: USA 310,178,000. Ireland: 4,178,000.

– Bankruptcies: USA: 1,572,597. Ireland: 17.

– Bankruptcies as a percentage of population: USA 0.5% (one-half of one percent); Ireland: 0.0004% (four one-millionth of one percent). In other words, USA had 12,500 percent more bankruptcies than Ireland.

The bankruptcy process in Ireland is nearly non-existent. Ireland does not offer its citizens a “fresh start” like America’s Chapter 7 bankruptcy process, nor does it offer a reasonable partial debt repayment plan like America’s Chapter 13 bankruptcy process.

In Ireland, people cannot use bankruptcy as a meaningful tool to deal with their debts. Irish debtors are vulnerable to constant lawsuits, harassment and garnishments because the Irish bankruptcy process is so strict and inflexible.

Should you file bankruptcy in Ireland, you are forced to repay creditors for at least twelve years, and only then if your creditors agree by a majority vote that such a “short” period of twelve years is reasonable, and that the amount you propose to repay is reasonable. Even worse, once you start a bankruptcy in Ireland, you cannot get out of the bankruptcy nor end it until your creditors agree by a vote that you should be allowed to exit the Irish bankruptcy system. Irish debtors have been known to be required to stay in bankruptcy, repaying their creditors, for as long as 29 years.

Reform legislation is pending in Ireland, but even the proposed law changes in Ireland are worse than what American bankruptcy law provides for its citizens today. The new Irish proposals still have no “fresh start” like America’s Chapter 7. The new Irish proposals suggest that debtors be forced to remain in bankruptcy for at least six years, repaying substantial portions of income to creditors, in what might be called an “earned start”.

“Current Irish bankruptcy laws misunderstand the nature of debt in [Ireland]. They’re designed to protect the general public from Dickensian villains who won’t pay their debts, not designed to facilitate the desperate thousands who can’t.” writes Patrick Freyne in “The Irish Times”. “It was a case of saying ‘listen, let’s make him bankrupt and don’t let him into business [for at least 12 years while he repays his debts] so others don’t lose money.’ But 90 per cent of those in trouble are honest decent people who lost money through no fault of their own.” says Irish chartered accountant Jim Stafford.

Many people are no less in debt in Ireland than are many Americans. Irish consumers had very little consumer debt in the 1980s, but this changed dramatically through the 1990s and into the 2000s. Many families and small businesses in Ireland now face the same level of debts as do struggling American families, as they have borrowed against (now disappearing) home equity and taken advantage of easy-to-obtain consumer credit such as vehicle loans and credit card loans.

Read about the Irish personal debt crisis and the historical reasons why Irish bankruptcy law is so strict and difficult.

Ideas for action: Accept the gift of what the US Government has declared available, which is a “fresh start” in Chapter 7, or a much gentler partial debt repayment in Chapter 13. While you are at it, thank God for the US of A.