Did the 2005 Bankruptcy “Reform” cause the world financial collapse?

Federal Reserve Bank of New York Staff Report No. 358 - Seismic Effects of the Bankruptcy Reform.

Remember the Bankruptcy Abuse [sic] Reform act of 2005? Yeah, the one that the credit card companies and banks got passed by buying the very best Congress money can buy. Turns out, according to the New York Fed's research, that since people going bankrupt after the BAR found it more difficult to stop paying their unsecured debts - i.e. credit cards - they were forced to stop paying their mortgages instead. Over 120,000 of them a year, according to the NY Fed researchers.

Hmm, Citibank: that is one of the biggest credit card issuers around, right? So, lezzee here. Citi went and bought itself a new bankruptcy bill in 2005. One result was that, (let’s give ‘em a break and multiply two years instead of three) a quarter of a million people had to default on their mortgages. That in turn caused a crisis in U.S. sub-prime mortgages. That in turn blew up the whole damn world financial system. And now, Citi is getting $308 billion in our money to save its sorry ass?!?

This would be effing hilarious if it weren't destroying so many peoples' lives at this point.

Seriously, I'm pretty sick and tired of people whining and screaming when I argue that we need to Euthanize Wall Street to save the economy, and that we need to keep the friends of Citi director Robert Rubin, like Larry Summers and Timothy Geithner, as far away from President Obama as we can.

OK, so that's my rant. Here's some excepts from the last month's Federal Reserve Bank of New York Staff Report No. 358, , Seismic Effects of the Bankruptcy Reform.

We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, distressed mortgagors could free up income by filing bankruptcy and having their unsecured debts discharged. BAR blocks that maneuver for better-off filers by way of a means test.

Our specific argument is that the bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures by shifting risk from credit card lenders to mortgage lenders. Before BAR, any household could file Ch. 7 bankruptcy and have credit cards and other unsecured debts discharged. Sidestepping unsecured debts left more income to pay the mortgage. BAR blocked that maneuver by way of a means test that forces better-off households who demand bankruptcy to file Ch. 13, where they must continue paying unsecured lenders. When the means test binds, cash constrained mortgagors who might have saved their home by filing Ch. 7 are more likely to face foreclosure.

The estimated impact of BAR on subprime foreclosures is substantial. For a state with average home equity exemption, the average subprime foreclosure rate over the seven quarters after BAR was 12.6 percent higher than the average subprime foreclosure rate over all states over the period before BAR. This translates to just over 32,000 more subprime foreclosures nationwide per quarter due to BAR.