The Volokh Conspiracy - Moral Hazard on your AM Dial:

I happened yesterday to have a long drive up the East Coast, during which I spent a fair bit of time listening to AM radio -- mostly sports talk, some of the news or other talk stations. It's an interesting take on things, the AM radio take. In about an hour and half of the Mike Francesa show on WFAN, the leading sports talk station in and around NYC, (during which, incidentally, I heard a wonderful half-hour Francesa monologue on the recent death of former Yankee Tom Tresh - anyone (like me) who grew up in the 50s and 60s in NYC and cared about baseball (and who didn't care about baseball in NYC in the 50s and 60s?) will surely have lots of memories of Tom Tresh) -- I must have heard advertisements for four or five different debt consolidation companies, all promising me that they could consolidate all of my credit card debt into a single payment, and that I would be able to make some of the debt disappear entirely. I suspect that boom days are ahead for these companies, and they're madly rushing to fill the anticipated demand. Sounds like a damned good deal! I'd love to pay 50 or 60 cents on the dollar on my credit card bill -- who wouldn't?

It's a strange business, debt consolidation. I happen to know a fair bit about it - not, thankfully, because I've had problems with credit card debt in the past, but because when I was practicing law 20 years or so ago, one of my biggest clients was one of the US's largest debt collection firms. The basic idea is pretty straightforward: if your bank or credit card company, to whom you owe $10K or $15K or whatever, believes that you are under water and unable to pay it all off, the rational thing for them to do is to sell your debt to a 3d party in exchange for some percentage of face value (and I can tell you that the negotiations over those percentages -- the bank wants them as high as possible, the consolidator as low as possible -- are ferocious).

The problem, of course, is that if consumers know that will happen, ex ante, they will be more profligate in their spending. If they know they'll be able to write off 50% of their credit card debt, all of a sudden the world is a big "EVERYTHING HALF PRICE!!" sale. Everything - that nice flat screen TV, those boots, that iPhone, a new refrigerator, etc. -- is a lot cheaper and more attractive, you don't have to pay my credit card bill in full.

Debt consolidators will only take you as a client if you're really a mess, financially, because their job is to convince the banks that you're never going to pay them back, and that your debts are damn near worthless to the banks. [That's why the debt collection firms aren't really interested in talking to you unless you have, say, $15,000 or $20,000 of debt].

It's just one of the small oddities of our financial system -- a nice little reward you can get for being monumentally imprudent in your spending. It's not, of course, why we're in the mess we're in -- but it's not completely unrelated to it, either.

	[David Post, October 17, 2008 at 1:07pm] Trackbacks Moral Hazard on your AM Dial: I happened yesterday to have a long drive up the East Coast, during which I spent a fair bit of time listening to AM radio -- mostly sports talk, some of the news or other talk stations. It's an interesting take on things, the AM radio take. In about an hour and half of the Mike Francesa show on WFAN, the leading sports talk station in and around NYC, (during which, incidentally, I heard a wonderful half-hour Francesa monologue on the recent death of former Yankee Tom Tresh - anyone (like me) who grew up in the 50s and 60s in NYC and cared about baseball (and who didn't care about baseball in NYC in the 50s and 60s?) will surely have lots of memories of Tom Tresh) -- I must have heard advertisements for four or five different debt consolidation companies, all promising me that they could consolidate all of my credit card debt into a single payment, and that I would be able to make some of the debt disappear entirely. I suspect that boom days are ahead for these companies, and they're madly rushing to fill the anticipated demand. Sounds like a damned good deal! I'd love to pay 50 or 60 cents on the dollar on my credit card bill -- who wouldn't? It's a strange business, debt consolidation. I happen to know a fair bit about it - not, thankfully, because I've had problems with credit card debt in the past, but because when I was practicing law 20 years or so ago, one of my biggest clients was one of the US's largest debt collection firms. The basic idea is pretty straightforward: if your bank or credit card company, to whom you owe $10K or $15K or whatever, believes that you are under water and unable to pay it all off, the rational thing for them to do is to sell your debt to a 3d party in exchange for some percentage of face value (and I can tell you that the negotiations over those percentages -- the bank wants them as high as possible, the consolidator as low as possible -- are ferocious). The problem, of course, is that if consumers know that will happen, ex ante, they will be more profligate in their spending. If they know they'll be able to write off 50% of their credit card debt, all of a sudden the world is a big "EVERYTHING HALF PRICE!!" sale. Everything - that nice flat screen TV, those boots, that iPhone, a new refrigerator, etc. -- is a lot cheaper and more attractive, you don't have to pay my credit card bill in full. Debt consolidators will only take you as a client if you're really a mess, financially, because their job is to convince the banks that you're never going to pay them back, and that your debts are damn near worthless to the banks. [That's why the debt collection firms aren't really interested in talking to you unless you have, say, $15,000 or $20,000 of debt]. It's just one of the small oddities of our financial system -- a nice little reward you can get for being monumentally imprudent in your spending. It's not, of course, why we're in the mess we're in -- but it's not completely unrelated to it, either.