Niall Ferguson Doesn't Know Diddly Squat About Bankruptcy

I'm a big fan of Niall Ferguson: his biography of the Rothschilds (at any rate, the first volume) is one of the best finance books I ever read. His other stuff is somewhat uneven, but good enough that I was looking forward to his latest, The Ascent of Money: A Financial History of the World.

And indeed it is a good book--a survey overview of all of finance from the stone age to last Sunday, with a touch that is light and confident. But boy, he sure doesn't know diddly squat about bankruptcy.

He wants to make the point that the American economy works pretty well, despite a lot of bankruptcies. He goes to Tennessee. On the surface, you can see why he might choose Tennessee: that's the state that consistently stands at the top of the league tables on bankruptcies per capita. See, e.g., this chart, showing Tennessee with a bankruptcy rate of 1.1 per thousand people, higher than any other state, against a national average of 0.55 per thousand (Hawaii is the lowest).

In particular, he goes to the Western District of Tennessee, Memphis, but here is where he goes off the rails. He doesn't seem to understand that Memphis stands almost at the top of the chart (second, behind the Southern District of Georgia) in Chapter 13 bankruptcies--which, for Ferguson's purpose, isn't really bankruptcy at all. In the year ending September 30, 2007, for example, 77 percent percent of all bankruptcies in Memphis were Chapter 13s, against a national average of only 39 percent (Georgia Southern led with 80 percent Chapter 13s).

Bankruptcy groupies will have grasped the point already. For non-groupies, here is the point: in "straight" bankruptcy (Chapter 7), the debtor turns his pockets inside out and the trustee divides the take (usually nothing) among creditors. But the debtor's post bankruptcy earnings do not go into the pot. This gives rise to the old insight, not quite false, that the best time to go bankrupt is the day before you get the good new job.

In Chapter 13, by contrast, the debtor agrees to surrender some or all of his post-bankruptcy earnings to satisfy pre-bankruptcy debts. So Chapter 13, unlike 7, is not (or is only secondarily) about stiffing creditors. Chapter 13 is more like indentured servitude, or a kind of civil parole. If you are trying to prove that a commercial economy survives even when debtors stiff their creditors, then Memphis is the long way to put.

As it happens, I think his main point is perfectly correct: the system does work, even with a high rate of bankruptcy discharges-and for what it's worth, the system worked quite well, thank you, even before the notorious 2005 Amendments, which made it much harder to filing bankruptcy (without, I suspect, putting much more money into the pockets of creditors).

If Ferguson wanted to get it right, he would have been much better advised to go to the Eastern District of Michigan (Detroit), which led the nation in number of cases (33,799), of which 34 percent were Chapter 13s (not far off the national average). Or maybe Colorado, with 14,238 cases, of which only 16 percent were Chapter 13s. But as it stands, his argument just doesn't make a lot of sense.