Here we move from the subject of odious debt to the subject of foolish debt. That is, debt that is foolish on behalf of both the borrower and the lender.
The bankruptcy legislation signed into law by President Bush last year should have sent a clear signal to shareholders of the banks that lobbied for that bill.
Why would these banks want or need such a law? Only one reason: They know they've built a house of cards and they hope against hope that the government will save their butts by somehow keeping the whole thing from toppling.
Say for instance you're a banker and you've made a loan to Ernie Bishop the cabdriver. You have all the papers there — his salary, insurance. And you can personally vouch for his character. You've done your job as a lender and you know that Mr. Bishop will be willing and able to repay the loan. That being the case, you don't care about some bankruptcy bill. You don't have to care about it. You've done your job wisely and well, and the money you've loaned out will be repaid without you needing to call in the cops or the Congress to threaten Ernie and his family.
Now, imagine you're a banker who's not satisfied with only the tiny stream of business you can get from people like Ernie Bishop. You want to grow, baby, grow, and to do that you're going to have to make a lot of loans and you're going to have to make them fast. You don't have time to check all the papers, or to bother with whether or not you can vouch for their character personally.
So you send out fliers announcing that everyone — absolutely everyone — is "preapproved" for a loan. You send out three billion fliers a year — or roughly 10 for every man, woman and child in the country. You start lending money hand over fist, throwing out money so willy-nilly that you scarcely even bother keeping track of who you're giving it to. "Identity thieves" are scamming fraudulent loans from you with little more than a middle name and a date of birth, but you're growing, baby, growing, and you're making money so fast that you can shrug off this theft as an inconsequential cost of doing business.
Then somewhere in the back of your mind, or down on the fifth floor, in accounting, some green-visored Jiminy Cricket starts clearing his throat and killing your buzz. All that debt, he points out, is only an asset if we can be sure it will be repaid. And an honest accounting seems to indicate that much of it can't and won't ever be repaid.
You look again at those balance sheets and at all that reckless debt. And you realize you're screwed.
Your only hope — and it's a long shot — is to get a law passed that says that people who don't have the money to repay these loans are legally compelled to repay them anyway.
Some part of you knows that such a law won't work, that all the kings horses and all the kings men can't collect money that just isn't there, that Congress cannot magically legislate that people unable to pay you back have to pay you back anyway.
A responsible banker wouldn't want, or need, or be bothered with, such a ridiculous law. An irresponsible banker will fight for it with the desperation of a drowning man.
We saw this law get passed. We saw which banks were fighting for it. What kind of fool would want to invest in such a bank?