7 ms·

This is very interesting. I think it's also worth pointing out that the data tends to show that the use of personal bankruptcy to game the system is actually v

This is very interesting. I think it's also worth pointing out that the data tends to show that the use of personal bankruptcy to game the system is actually very low. I find that when the subject is brought up in a political context, this distinction is often not made. Here is a great lecture from Elizabeth Warren on the subject: http://www.youtube.com/watch?v=akVL7QY0S8A http://www.youtube.com/watch?v=akVL7QY0S8A

Retric 14y ago
I think it's also worth noting that Risk of bankruptcy enables similar accounting games even for healthy company's. Basically a bank that's leveraged 10x might as well leverage 50x because the upside keeps increasing linearly with more debt but the downside is practically fixed.
- refurb 14y ago
  The upside would not keep increasing linearly. When leveraging, the current debt burden of the company would be used to determine the level of risk and thus the interest rate. The level is risk is associated with the level of assets of the company (thus the ability to recover in case of default). I would agree that a bailout creates a floor to loss, but then again a natural floor exists anyways (the net assets of the company).
- meric 14y ago
  That's why if you're lending a bank money, use covenants. http://en.wikipedia.org/wiki/Loan_covenant http://en.wikipedia.org/wiki/Loan_covenant People already do this with bank deposits when there is no government guarantee leading to bank runs.
anamax 14y ago
> Here is a great lecture from Elizabeth Warren I wouldn't put too much weight on Warren's work on bankruptcy. See http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/ http://www.theatlantic.com/business/archive/2010/07/consider... .
- patdennis 14y ago
  Call me elitist, but I hardly think that a single story from a blogger/editor at the Atlantic is enough to discount all of the work of one of the preeminent scholars of bankruptcy law in the United States. Warren has successfully defended her conclusions in academic circles for years.
  - anamax 14y ago
    > Call me elitist I'll call you overly impressed by irrelevant credentials. (She's not an economist or statistician.) As for me, the validity of her conclusions don't depend on where she works, whether she was wrong about being part Native American, etc. > Warren has successfully defended her conclusions in academic circles for years. The Atlantic story contains cites to some academic eviscerations of Warren's work....
  - MichaelSalib 14y ago
    We could use a bit more elitism. If the best criticism of Warren's work one can find comes from an innumerate like McArdle [1], it's probably pretty sound. [1] http://www.balloon-juice.com/2010/12/23/gastritis-broke-my-calculator/ http://www.balloon-juice.com/2010/12/23/gastritis-broke-my-c...
- tptacek 14y ago
  I wouldn't put any weight on an analysis by Megan McArdle either. I like Warren as a politician, am deeply ambivalent about her as a policymaker or regulator, have no idea about her credibility as an academic, and read McArdle long enough to know that her issue here is ideological, and that she's not particularly credible on issues that touch that ideology. Preempting the obvious challenge to this comment: it's not that I'm going to point to any particular point in this particular blog post of hers and call BS on it (although I think it covertly lapses into subjectivity several times), but rather that her particular choices of papers and theses to take issue with aren't necessarily a fair representation of Warren, "scholar". Which is what her headline purports the post to be. There was no way McArdle was going to be objective about Warren. That's a little bit like expecting Paul Krugman (not that I'm putting them on the same level!) to be objective about Paul Ryan.

Retric 14y ago

I think it's also worth noting that Risk of bankruptcy enables similar accounting games even for healthy company's. Basically a bank that's leveraged 10x might as well leverage 50x because the upside keeps increasing linearly with more debt but the downside is practically fixed.

refurb 14y ago
The upside would not keep increasing linearly. When leveraging, the current debt burden of the company would be used to determine the level of risk and thus the interest rate. The level is risk is associated with the level of assets of the company (thus the ability to recover in case of default). I would agree that a bailout creates a floor to loss, but then again a natural floor exists anyways (the net assets of the company).
meric 14y ago
That's why if you're lending a bank money, use covenants. http://en.wikipedia.org/wiki/Loan_covenant http://en.wikipedia.org/wiki/Loan_covenant People already do this with bank deposits when there is no government guarantee leading to bank runs.

anamax 14y ago

> Here is a great lecture from Elizabeth Warren I wouldn't put too much weight on Warren's work on bankruptcy. See http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/ http://www.theatlantic.com/business/archive/2010/07/consider... .

patdennis 14y ago
Call me elitist, but I hardly think that a single story from a blogger/editor at the Atlantic is enough to discount all of the work of one of the preeminent scholars of bankruptcy law in the United States. Warren has successfully defended her conclusions in academic circles for years.
- anamax 14y ago
  > Call me elitist I'll call you overly impressed by irrelevant credentials. (She's not an economist or statistician.) As for me, the validity of her conclusions don't depend on where she works, whether she was wrong about being part Native American, etc. > Warren has successfully defended her conclusions in academic circles for years. The Atlantic story contains cites to some academic eviscerations of Warren's work....
- MichaelSalib 14y ago
  We could use a bit more elitism. If the best criticism of Warren's work one can find comes from an innumerate like McArdle [1], it's probably pretty sound. [1] http://www.balloon-juice.com/2010/12/23/gastritis-broke-my-calculator/ http://www.balloon-juice.com/2010/12/23/gastritis-broke-my-c...
tptacek 14y ago
I wouldn't put any weight on an analysis by Megan McArdle either. I like Warren as a politician, am deeply ambivalent about her as a policymaker or regulator, have no idea about her credibility as an academic, and read McArdle long enough to know that her issue here is ideological, and that she's not particularly credible on issues that touch that ideology. Preempting the obvious challenge to this comment: it's not that I'm going to point to any particular point in this particular blog post of hers and call BS on it (although I think it covertly lapses into subjectivity several times), but rather that her particular choices of papers and theses to take issue with aren't necessarily a fair representation of Warren, "scholar". Which is what her headline purports the post to be. There was no way McArdle was going to be objective about Warren. That's a little bit like expecting Paul Krugman (not that I'm putting them on the same level!) to be objective about Paul Ryan.