Sequestration Stimulus Program No. 1 – Bankruptcies

Michael Collins

iconWe are at the mercy of fools.  If members of Congress won’t stop the March 1 budget sequestration, there is a price to pay.  Congress won’t pay it.  We will.

Let’s start with one of the worst financial crises that can hit an individual or family – bankruptcy.   Increased bankruptcies are just one of the likely outcomes of the latest congressional action to sabotage the barely noticeable economic recovery.  Let’s call it the sequestration stimulus program.

Sequestration is a mandated budget cutting process that kicks in should Congress fails to pass a budget that includes spending cuts required by the 2011 Budget Control Act.  This was part of the deal to get the debt ceiling raised in August 2011, our last budget drama.  Nondefense spending will take a 5% hit and, the sacred cow, defense spending, will be reduced by 8%.   The cuts are applied across the board to discretionary programs (Social Security and Medicare are excluded).

jobsThere should be a compromise.  Who wants to risk a return to the worst of the agony that started with the 2008 Wall Street collapse?  For the Tea Party, some things are more important than the suffering brought on by a major economic down turn.  The problem is, nobody can figure what those things are.  The general theme of Tea Party rhetoric is, We’ve got a terrible budget crisis and we must face up to it and fix it right now.  Hence the breakdown and the danger.  If we fix it right now, we risk higher unemployment and a disruption in what’s called an economic recovery.

Back to the Future

Thanks to the Bankruptcy Data Project at Harvard, we have some idea of what will happen.  Bankruptcies will soar.


Bankruptcy Data Project at Harvard

Using chapter 7 and 13 bankruptcies, the weakness of the economy was apparent as far back as 2006.  There is a clear trend upwards in bankruptcy petitions from 2006 until October 2008, the beginning of the Wall Street collapse.  From the start of 2008 through the twin peaks of petitions, March 2010 and March 2011, the increases are stunning.  Chapter 7 petitions increased by a factor of 10 comparing January 2006, to the worst month represented in the graph, March 2010.  Chapter 13 petitions increased by a factor of 4 using the same comparison.

Over the past several years, bankruptcies due to medical crises occurred at an alarming rate, over 60% according to a major study in 2007.  The numbers would be worse were it not for the bankruptcy reform act passed by Congress in 2006.  This bipartisan act toughened the criteria to file and excluded certain medical expenses for those who could file.


Bankruptcy Data Project at Harvard

The giant corporations, particularly those in the defense industry, must be at their wits end.  Before the Tea Party takeover of the Republican Party, it would take a phone call or two to calm legislative actions that posed an imminent danger to the economy.  Sure, there were countless bad bills passed that created the current financial mess but those bills never had a real world consequence that was going to hit in just days.

But members of Congress don’t care.  They can act out their political fantasies and inner demons with impunity.  Many will be reelected.  The rest will cash in their chips for services performed and wait out their cushy retirement with full medical benefits.



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Michael Collins

DC area

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