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Chapters of Eleven

An hour before closing time, the Chicago Mercantile Exchange hardly seems like a dignified institution at the epicenter of American finance: It’s more like a sports bar. Throngs of grownup frat-boy traders stare at numbers flashing on a gigantic screen. Moments of calm alternate with paroxysms of activity, as the Animal House lookalikes pump their fists into the air and gesticulate like manic umpires to the callers ringing the pit. Pieces of paper fly through the air, deftly handled by college-age runners wearing the baggy gold jackets of Team Merc. Abstract pork bellies and livestock—and the abstractions of abstractions, stock indexes and interest rates—are furiously tossed back and forth in a never-ending game that seems always to be in the ninth inning.

Does bankruptcy ever enter the minds of the wild-eyed millionaires who bounce like cheerleaders in the panicked atmosphere of the pit? If so, they can forcibly expel the thought with a few adrenaline-fueled trades. But come October, the wizards at the Merc—alchemically spinning loss into gold—won’t be able to take their minds off going bust. That’s when the Merc begins trading a brand new future index based on the quarterly number of bankruptcies. The Merc’s new toy—the Quarterly Bankruptcy Index—will take the number of bankruptcies in the previous quarter as a baseline. Though the product may sound bizarre, it’s supposed to function like insurance: The credit card companies stand to lose a small amount if bankruptcies fall, but they’ll offset potentially great losses if bankruptcies rise. Peach farmers and hog merchants can buy futures to lower risk; why shouldn’t banks, credit card companies, and department stores be able to use the derivatives market to offset their mounting losses to bankruptcy?

In England, bankruptcy was punishable by death through the eighteenth century.

The notion of people getting rich betting on the spiraling number of bankruptcies may seem a little odd to rubes like you and me. But personal bankruptcies hit an all-time high in 1997, with more than 1.3 million people filing, and even more are expected to file in 1998; bank card companies claim to have lost between $10 and $12 billion as a result. Not that anyone should feel sorry for the credit industry, which borrows money at standard rates and lends it out at exorbitant ones. But, greedy bastards that they are, they’re looking for some new financial tool to help insure themselves against loss—that is, when they aren’t busy pressuring Congress to stiffen the penalties for bankruptcy. What makes the “deadbeat index” unusual is its casual nonchalance toward bankruptcy. While moralists vent public outrage over the spiraling number of bankruptcies, the master financial minds of the Merc have admitted the truth: Bankruptcy is normal today, an aspect of economic life to be insured against as though it were a fact of nature like drought or flood.

This routinization of bankruptcy is the polar opposite of the old Weberian version of economic behavior. The farmers and artisans of centuries ago felt a strict identity between self and pocketbook. Financial dealings were thought to reveal the most intimate truths about one’s character. In the old pre-capitalist world, bankruptcy received the stiffest of punishments; the debtor relinquished freedom, property, and sometimes life itself. In England, bankruptcy was punishable by death through the eighteenth century; imprisonment for debt remained the norm until the days of Dickens. But advanced capitalist states have long since given up pushing business moralism to such extremes and have ceased to equate financial death with the real thing. Nineteenth century reformers were horrified by the cruelty of debtor’s prisons, but they were also disturbed by the fact that their own bourgeois peers could be thrown willy-nilly into the bin simply for making a bad deal or two right before a recession. As our contemporary economists might say, an economy built on rewarding risk can’t afford to mete out too-harsh punishment for daredevil entrepreneurs whose stunts occasionally leave them lying bruised on the ground.

During the last fifty years, though, bankruptcy has been democratized. Today it’s a condition that might be faced by anyone, not just entrepreneurs. And while the spending binges that land us in bankruptcy are hardly deeds of heroic capitalist risk-taking, they are far more important in reality to our larger economic well-being.

Nonetheless, this latest phase in the development of bankruptcy has brought loud public calls for a revival of the old pre-capitalist horror toward debt. Credit industry hacks and their minions on the Hill have taken up the mantle of personal responsibility, and have sought to transform the Nanny State into the Daddy State, a stern Federal superego that will scold debtors along with pregnant teens, divorcees, and other bearers of bad values. “Bankruptcy has become like a carwash. People go in, spend a little time inside and come out spotless,” laments Mallory Duncan of the National Retail Federation, apparently longing for the days of public stocks and debtor’s prison. “Bankruptcy is becoming a financial strategy for too many Americans,” moans Donald Ogilvie, executive vice president of the American Bankers Association, in a letter to the Wall Street Journal. “There are a whole lot of child-like adults with adult-like credit lines,” keens Ronald Utt, senior fellow at the Heritage Foundation. But the ain’t-it-awful crowd, hearkening back to yesteryear’s business moralism, blithely ignores what the Merc cannily admits. Bankruptcy is a crucial safety valve for an economy that depends on mass consumption and low wages.

If the real cause of the rising number of bankruptcies was some sudden erosion of moral fiber, it would be testament to the malleability of the human spirit. In fact, we really don’t need to juice up our econometric model with a virtue variable to see what has caused the rise in bankruptcies. As it turns out the change has fairly mundane origins: Bankruptcy is closely correlated with the ratio of debt to income, which has been rising rapidly ever since real wages stopped rising in the early seventies. In other words, as people began to borrow to make up for stagnant wages, bankruptcies started to rise.

It’s commonplace to blame the rise in bankruptcies on the new bankruptcy code, which, starting in late 1979, made it easier to discharge credit card debt. But bankruptcies had actually been climbing throughout the seventies, from 173,000 personal and business bankruptcies in 1973 to 254,000 in 1975, before falling slightly to 226,000 in 1979. During these years, bankruptcy law didn’t change, but consumer indebtedness did: Between 1973 and 1979 the ratio of total household debt to total household income rose from 58.6 percent to 64 percent. After the new law took effect, it’s true, personal bankruptcies rose by 100,000, but the law was more a response to the bankruptcy trend than a cause.

The debt-income ratio rose steadily through the eighties and nineties, reaching 83.4 percent of household income in 1994; by 1997 debt service payments reached a shocking 16 percent of total household income. Credit card use climbed especially sharply during the eighties and the nineties. Between 1984 and the present, revolving credit (short-term debt, mainly credit cards) has more than tripled. And with rising debt, bankruptcies have rocketed, climbing from about 300,000 a year in the early eighties to more than one million in 1996. This year it seems that once again a record number of people will file—more than 1.4 million.

This mountain of new debt may seem a sure sign of a country headed for the poorhouse. But in fact, the seemingly exorbitant amount of consumer debt is in large part responsible for the prosperity we’ve enjoyed these past few years. The nineties expansion, in contrast to the Keynesian expansion of the sixties, is fueled by consumption; consumption has averaged 67.8 percent of GDP in the nineties, a higher proportion than during any other expansion since World War II. Debt explains the otherwise mysterious appearance of a consumption-driven boom at a time when real wages have been falling or stagnant. The fact that the debt-to-income ratio has been climbing since 1973—the postwar peak for real wages—suggests that families have taken on debt in order to compensate for slow wage increases. Today, credit-driven spending is at historic levels, accounting for about 29 percent of the growth in consumption in the expansion that commenced in 1991. Today’s credit explosion makes The Bonfire of the Vanities look sober; during the eighties, credit accounted for just 23 percent of growth in consumption. From the standpoint of economic growth, there’s no doubt the handy income supplement made possible by debt has been a lifesaver. But the corollary is a much larger number of bankruptcies, since stagnant wages and rising debt together mean that at some point people—well, lots of people—are inevitably going to default.

Debt also has ideological benefits. By putting purchasing power into the hands of the vast majority without increased wages, it creates a fiction of social equality and sustains mass purchasing power even as income inequality widens. A million-odd bankruptcies is a small price to pay for such a handy illusion. Without the cushion of widely available credit, we’d risk a broad economic contraction, not to mention a whole lot of demands for higher wages. Rising profits, meager wage growth, and manic consumption are what drives the nineties boom. Someone’s gotta pay—and for the time being, the bill’s going to Visa.

But who are the debtors who have been so much in the news of late? Are they the bearers of a new strain of shortsighted selfishness? Actually, they are more or less a cross section of the middle class. In occupational makeup, they mirror the country as a whole, but their incomes are far lower, and their debts far higher, than the general population. Median family income for bankruptcy petitioners in 1991 was $18,000—half the national average—and almost 30 percent of debtors had incomes below the poverty line. Debtors often owed one-and-a-half times their yearly income in short-term debt.

What these numbers suggest is that bankruptcy is now a routine part of middle-class American life. People borrow heavily, especially during expansions, when they expect—perhaps irrationally—that they’ll be able to pay back all their debt. But should a single crisis befall a heavily indebted household, it’s easy for it to fall hopelessly behind. Much of the rise in bankruptcies has occurred during economic upswings, which puzzles pundits, though it may not be so complex: In good times banks are willing to lend, credit card companies hawk their wares, and people are lulled into a false sense of economic security. But when disaster hits they topple right away: More than half of 1991 bankrupts reported interrupted employment in the two years before they filed. Forty percent of older bankrupts faltered under heavy medical debt. Many are single parents. Their commonalities are not immorality but a brush with a single financial disaster—divorce, layoff, catastrophic heart attack—which is all it takes to send a debt-ridden family’s finances up in flames. So an extremely high bankruptcy rate is pretty much to be expected in a society with scant social welfare provisions, stagnant wages, easy credit, and a high cultural premium on status-through-consumption. You may have lost your middle-class salary; you may not have the job security of a degree or a union. But your debt is as good as anyone else’s.

Lending replaces decent wages, masking income disparities even while aggravating them through staggering interest rates.

But for other debtors, the rude disruption of their middle-class lifestyles hasn’t been the result of sudden disaster; it’s been mere pretense from the start. These are spenders who aren’t weighed down by a rare big-ticket item but who bankrupt themselves with spending sprees totally out of keeping with their incomes. Poor people are the credit industry’s growth sector; between 1977 and 1989 the proportion of households earning between $10,000 and $20,000 who have at least one credit card rose from 33 percent in 1983 to 44 percent in 1995, according to Federal Reserve economist Peter Yoo. Even among households with incomes under $10,000, 32 percent owned credit cards in 1995. Lower-income households also use their cards more heavily than they used to. (Although wealthy households still account for the majority of credit card debt, average credit card debt for households in the lower half of the income distribution increased at a 14 percent annual rate between 1992 and 1995, compared to an 8 percent annual rate for households in the top half of the income distribution.)

For poorer families, debt is an irresistible supplement to low incomes. I went to Chicago’s federal bankruptcy court and looked through some of the petitioners’ files. Among them I found Mary B., a middle-aged woman, married with no children. She’s worked at the National School Towel Service for sixteen years; her annual salary is $12,000. She will probably never buy a home or get a degree. Nonetheless, she declared bankruptcy in April 1998, after running up credit card bills of $9,200. According to court documents, she charged $5,300 of “ordinary household goods and supplies” to her Discover Card, and $3,200 more to her First Chicago card. Let’s reflect on what these might be: A trip to Sears for a new washer-dryer? A jaunt to Marshall Field’s, perhaps for a cute pair of earrings and a chi-chi black dress? Marie Anne T.’s files tell a similarly ordinary story. A nurse technician for five years, earning a salary of $18,000, this single mother with two young adult children managed to ring up bills of $13,700 on her credit cards in 1997, increasing her disposable income by 76 percent and making stops at Sears (for a new lawn mower and stereo, according to court files) and at Montgomery Ward (new tires for the car?). She also owed $46,000 in secured debt, mostly for no fewer than three automobiles, shared with her children. Neither Mary nor Marie Anne could realistically have had hoped to pay back her exorbitant bills, no matter how bountiful the economy seemed. Instead, each one simply “passed” as middle class for a year, flaunting her new clothes and household goods.

There’s an odd poetic justice in the bankruptcies of Mary and Marie Anne. Banks and credit companies are, strictly speaking, the direct source of their illusory “income.” But considered more abstractly, it is their bosses who are lending them money. Most households are net debtors, while only the very richest are net creditors. In an overall sense, in other words, the working classes are forever borrowing from their employers. Lending replaces decent wages, masking income disparities even while aggravating them through staggering interest rates. If Mary’s wages were higher, she might not have needed those credit cards—and, of course, her boss wouldn’t have quite so much money lying around to lend. Credit and bankruptcy can sometimes even seem like class warfare by other means: Mary and Marie Anne are simply treating themselves to a long-delayed raise.

But there is also something tragic about quick bankruptcy and easy credit, about the buying frenzies of folks like Mary and Marie Anne or their wealthier counterparts who are laid low by exclusive summer camps, music lessons, and private schools. Bankruptcy may provide short-term relief for consumers locked into endless debt servicing, but it can’t deliver on the promise of sunny days and blue skies held out by the lawyers shilling on late-night TV. Upper-class moralists may gnash their teeth, but bankruptcy serves their interests fairly well: By obscuring collective problems, credit provides easy individual escapes into a world where everything can be yours. Frustration with empty, boring work, a stagnant salary, and the tedium of making ends meet can be expressed as the craving for a waffle iron, a piece of lingerie, a bright plastic toy for the kid. Bankruptcy transforms the nasty crunch confronting the middle class—“downsizing,” rising housing prices, slow real income growth, attacks on unions—into an individual morality play of desire, gluttony, confession, and finally redemption, as the forgiven debtor goes out to borrow once again.