Three Myths about the Consumer Financial Product Agency

This guest post was contributed by Elizabeth Warren, chair of the Congressional Oversight Panel and the Leo Gottlieb Professor of Law at Harvard University. (Update: more on the case for a CFPA in her YouTube video, released yesterday.)

I’ve written a lot about the creation of a new Consumer Protection Financial Agency (CFPA), starting with an article I wrote in the Democracy Journal in the summer of 2007. My writing has helped me work through the idea and has advanced a conversation about what kind of changes in financial products would be most effective. A couple of weeks ago, I testified before the House Financial Services Committee about why I think a new consumer agency is so important, and I’ve argued the case many times.

Today, though, I’d like to post specifically about some of the push back that has developed on this issue.  In particular, I’d like to focus on three big myths – myths designed to protect the same status quo that triggered the economic crisis.

MYTH #1:  CFPA Will Limit Consumer Choice and Hinder Innovation

At a recent hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify one consumer who chose double-cycle billing to be included within the terms and conditions of his or her credit card contract.  It was a great moment.  If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages.  If the status quo is about choice, then explain why Citibank declared itself consumer friendly, dropped universal default, then quietly picked it up again the following year because they said consumers couldn’t tell whether they had the term or not.

The truth, of course, is that no consumer “chooses” to accept the tricks and traps buried within the legalese of financial products.  Rather, consumers must choose among various products with one feature in common: dozens of pages of incomprehensible fine print.

The CFPA will not limit consumer choice.  Instead, it will focus on putting consumers in a position to make choices for themselves by streamlining regulations, making disclosures smarter, and making financial products easier to understand and compare. The Agency will promote plain vanilla contracts—short, easy to read mortgages and credit card agreements.  The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure—it’s just a way to hide more tricks.  Real disclosure means that a lender has to be able to explain what it is selling so that the customer can read it and understand it.  Once consumers can understand the risk and costs of various products – and can compare those products quickly and cheaply – the market will innovate around their preferences.

Daniel Carpenter, a Professor of Government at Harvard University, has written a great deal about the modern pharmaceutical industry.  While anyone with a bathtub and some chemicals could be a drug manufacturer a century ago, Carpenter points out that drug companies were willing to invest far more in research and development to bring good drugs to the market once FDA regulations drove out bad drugs and useless drugs.  Good regulations support product innovation.

MYTH #2:  The CFPA Will Add Another Layer of Regulation and Increase Regulatory Burden

Current regulations in the consumer financial area are layered on like pancakes—see a problem and fry up a regulation, but don’t integrate it with the earlier regulation.  Today, seven different federal agencies have some form of regulations dealing with consumer credit.  The result is a complicated, fragmented, expensive, and ineffective system.  With consolidated and coherent authority, the CFPA can harmonize and streamline the regulatory system—while making it more effective.

But the real regulatory break-through for the CFPA would be the promotion of “plain vanilla” contracts that would likely meet the needs of about 95% of consumers.  These contracts would have a regulatory safe harbor.  By using an off-the-shelf template for a plain vanilla contracts and filling in the blanks for interest rates, penalty rates and a few other key terms, a financial institution can legally satisfy all its federal regulatory requirements—no need to do more.

Of course, some banks would want to offer more complicated products.  For many, they could file-and-use, so long as they met the same regulatory standards of adequately disclosing risks and explaining costs—briefly enough and clearly enough for people to understand them.

A streamlined new regulatory regime would have a serious impact on the credit industry.  Today’s complicated disclosure system favors big lenders that can hire a legion of lawyers to navigate the rules—and spread the costs among millions of customers.  Those complex rules fall much harder on a smaller institution that must navigate the same regulatory twists and turns, but with far smaller administrative staffs.  Plain vanilla contracts will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward regulatory compliance and more toward customer service and innovation.

MYTH #3:  Prudential and Consumer Regulation Cannot Be Separated

Make no mistake: This is a fancy claim for the status quo.  If the CFPA can be left with the current bank regulators, then it can be smothered in the crib.  For decades, the Federal Reserve and the bank regulators (the OCC and the OTS) have had the legal authority to protect consumers.  They have brought us to this crisis by consistently refusing to exercise that authority.

The agencies’ well-documented failures – discussed in detail by Travis Plunkett and Ed Mierzwinski here and by Professor Patricia McCoy here — are largely the result of two structural flaws.  The first is that financial institutions can now choose their own regulators.  By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another.  The regulators’ budget comes in large part from the institutions they regulate.  If a big financial institution leaves one regulator, the agency will face a budget shortfall and the agency will likely shrink.  Knowing this, financial institutions can shop around for the regulator that provides the most lax oversight, and regulators can compete by offering to regulate less.  Regulatory arbitrage triggered a race to the bottom among prudential regulators and blocked any hope of real consumer protection.

The second structural reason that prudential regulators failed to exercise their authority to protect consumers is a cultural one: consumer protection staff at existing agencies find themselves at the bottom of the pecking order because these agencies are designed to focus on other matters.  At the Federal Reserve, senior officers and staff wake up every morning thinking about monetary policy.  At the OCC and OTS, agency heads wake up thinking about capital adequacy requirements and safety and soundness.  Consumer protection issues are—at best—an afterthought.  The CFPA would create a home in Washington for people who wake up each morning thinking about whether American families are playing on a level field when they buy financial products.  By bringing economic experts who care about consumer financial issues under one roof, CFPA can develop as a smart agency that develops real expertise.

A single consumer agency would also be able to make sure that the same products face the same regulations.  Today, mortgages are regulated differently depending on whether they are issued by a bank, a nationally-chartered thrift, a nationally-chartered credit union, and so on.  Imagine for a moment if toasters or toys had different safety standards depending on who manufactured them. Or, even worse, imagine if some manufacturers could bypass safety standards almost in entirety – as is now the case for non-depository financial institutions. It is time for one Agency to regulate financial products in a consistent manner across the board.

In 2001, Canada created an independent agency much like the proposed CFPA.  I recently spoke with some Canadian economists, and they not only said the system works, they also expressed bewilderment about the idea that prudential and consumer regulation would be combined.  As one said, they “have different ways of thinking about the world.”

At the end of the day, industry lobbyists try hard to invent myths and make things sound confusing to intimidate the public and to keep policymakers from acting.  But this issue is simple:  keeping safety and soundness and consumer protection together has not ensured safety and soundness, has not protected consumers, has not fostered choice and innovation, and has not minimized regulatory burden.  In fact, the current regulatory structure that combines consumer protection with other bank oversight responsibilities has led to the kind of bad regulatory oversight that has led us to this crisis.  The CFPA would put someone in Washington—someone with real power—who cares about customers.  That’s good for families, good for market competition, and good for our economy.

Update: Fixed link to Democracy article in first paragraph. Thanks to Uncle Billy vs. Mont Pelerin.

By Elizabeth Warren

97 responses to “Three Myths about the Consumer Financial Product Agency

  1. Nothing is more simple and clear than that.

    Which is why it is anathema to the rackets. So much for the efficient market hypothesis, where everyone has the same information.

    (Is EMH “information” supposed to be like the Catholic doctrine of “equivocation”, where as long as god knows you know the truth it’s OK to lie? Not having attended Chicago, I don’t know.)

  2. Yup. Very simple and very clear. And very telling that this gets published on a weblog, while the views of the banks get aired in the pages of the Post, Times, and Journal.

  3. I had to look it up, and thought there might be others who didn’t know what “prudential regulation” meant:

    http://mitpress.mit.edu/catalog/item/default.asp?tid=7331&ttype=2

    I’m sorry, but this post did two things at once, simultaneously making an excellent case for a lean mean CFPA, and painting “innovation” as somehow desireable. Why? On your television appearances you’ve made the same point. Please explain clearly why we need financial innovations. To compare them to medical advances is, to my simple mind, bizarre.

  4. The link to Prof. Warren’s 2007 article doesn’t work. Here’s another:

    http://www.democracyjournal.org/article.php?ID=6528

  5. Ms. Warren, you are a legend. Thanks for fighting for us.

  6. I am very happy that someone like Elizabeth Warren is in a position to advocate on behalf of consumers.

    I’m shocked that she seems alone in her concern.

    The financial system tanked last fall, bringing down the global economy.

    The failure of the financial community to behave in a sensible and pro-business manner brought down the global economy. Instead of behaving like smart, savvy businesspeople, the highly compensated executives in finance behaved like frat boys at a craps table in Vegas. Let’s take a look:

    – They provide high-cost mortgages to large numbers of people who had no hope of paying them back.

    – They packaged together these terrible loans, bundling them with the isolated “good loan” in an attempt to make them feel good about the package – and then sold these securitized mortgages to any variety of pension, retirement and college funds.

    – They sold insurance instruments for securities they did not understand, thus significantly undervaluing the capital needed should a collapse occur.

    The results were catastrophic – for everyone outside of Wall Street. Huge retirement, savings and college fund portfolio losses seen in every middle class household. Enormous job losses – hundreds of thousands of productive people shed from jobs each month.

    Today, the middle class is hanging on by a thread.

    The financial sector, on the other hand, was propped up by a very large federal bailout, which also went to provide billions in bonuses to the people whose stupidity, greed, ego – whatever excuse you prefer – led to the crisis.

    Thanks to TARP, we’ve firmly cemented TBTF into our financial system – because we only bailout those who are TBTF. Consolidation has occurred that has made TBTF even bigger.

    There is a continuing absence of regulatory control over the shadow banking sector, leading firms doing business in that system to declare excessive profits and excessive bonuses this quarter – yet these firms exist today ONLY because the feds saved their sector last fall.

    And our nation continues to sit on the toxic dump of bad loans.

    That Elizabeth Warren is paddling so hard against the current in a quest for reform is frustratingly wrong.

  7. I’m a former student of Professor Warren’s — go Professor Warren!!! — so I’ll take a stab at the question regarding the utility of financial innovation.

    Innovation in the consumer financial products context means anything that makes a credit product a more effective and useful component of our lives. For example, a credit card company could offer more effective financial budgeting and analysis tools, or a mortgage company could permit qualifying customers to sign up for a “missed payment” protection benefit that would allow such customers to miss two or three payments without entering default. Though innovation is like invention — it is a bit difficult to envision exactly how products can be improved until they actually are — the point is to orient companies towards competition on the provision of perceivable *benefits* to consumers rather than continued innovation in the inclusion of hidden detriments. And, as Professor Warren points out and Citigroup proved, this reorientation is unlikely to happen in the market so long as consumers can’t discern why one credit card is preferable to another.

  8. I suggest we think bigger. Why have credit cards at all? Seems to me that the good they can do to the consumer is minor, while the harm can be catastrophic. Has anyone analyzed whether it is a fair trade? Why not adopt the system employed in some other countries in which the balance must be paid off at the end of the month? Other than the banks, who would really lose from such a system?

  9. If a CFPA is effectively chartered solely to limit financial products to be lean , honest, forthright and simple, then it will go along way to cleaning up the fraudulent financial mess.

    However, if it is allowed to stray into social engineering, then it will quickly become yet another agent of Crony Capitalist Oligarchy.

  10. Lavrenti Beria

    People like Warren are given a public voice by the Regime solely to give the impression that the scum actually running things really ARE on the side of the PBS crowd that still believes Jim Learer isn’t a rodent after all. She’ll be there making comments like these as long as (1)the fantasy persists that an authentic political opposition exists in this country, and (2) that things would change if only we were to have more “decent people” like Elizabeth in government.

  11. Elizabeth Warren for Secretary of Treasury.

  12. I’ve only had a chance for a quick look at this post. I’ve noticed since joining this blog the vast majority of economists and traders, financiers (or whatever they’re called) are men. So it’s very nice to see a woman in her position.

    I agree with Daniel’s question. The American credit card industry strikes me as predatory and rent seeking.

    Then there is the issue of asymmetrical information. We we all know who the asymmetry has favoured in more than spades. No person on Main Street can be “symmetrically” informed. We just try our best.

    So a CFPA that has teeth, is independent, and can advocate would be close to ideal.

  13. Hooray for Elizabeth Warren! Home owners’insurance policies are not allowed to be arbitrarily complex; there’s no reason why consumer financial documents should be so, other than trickery.

  14. We could do that, but then “innovation” would take place. Islam doesn’t allow lenders to charge interest? Not a problem! “Call it fees, not interest”

    Tony, thank you for your response above. I would love to hear it in Prof. Warren’s words, however. Even in the video that the baseline folks appended to this post she uses “innovation” vaguely again. Regarding the video — it is very slick. Who paid for it? Center For American Progress by way of Americans For Financial Reform (AFFR)?

    If you look at the AFFR website, you see that one of the great leaders of the civil rights movement, Heather Booth, is in charge. But who are her sidekicks? Lisa Donner is the Deputy Director. Looks like she was associated with something called the “Half in 10″ program, associated with the Center For American Progress, ACORN, etc. How come her “experts” page at the Center For American Progress has been deleted?

    Here’s what was there from the google cache:

    Are they trying to play down her (previous?) relationship with SEIU and ACORN? She was just getting too many phone calls from her expert page at Center For American Progress (CAP)?

    Do these folks have a direct line to Chicago’s John Podesta, president of CAP? Together with his brother Tony, he ran “Podesta and Associates,” a lobbying firm. He was Bill Clinton’s Chief of Staff, and according to this, oversaw the pardons of people like Marc Rich at the end of Clinton’s term. Mini-trend: Clinton, Chicagoan chief of staff; Obama, Chicagoan president and chief of staff.

    http://en.wikipedia.org/wiki/John_Podesta

    Here’s an interesting article on Tony Podesta:

    http://www.wired.com/wired/archive/6.12/podesta.html?pg=1&topic=&topic_set=

    What do you want to bet that the painting by the young israeli artist in his office wasn’t bugged?

    Come on guys, as far as influences on the economy is concerned this is what really counts. Put one or two lobbyists in a room with 15,000 well-intentioned economists — guess who comes out. Get them working together — they break the world.

  15. I’m sorry, but “consumer protection” is one of the biggest red herrings in this whole debacle. Cracking down on outright fraud is one thing, but having the government pre-approve specific kinds of transactions? We are not talking about someone manufacturing a toxic drug in a bathtub here; we are talking about people’s capacity to make a decision for themselves, or lack thereof.

    I’d guess that half of the people who ended up with non-traditional loans were speculators betting they could refi based on asset appreciation and the other half were just plain financially illiterate. Sure, even a plain vanilla mortgage contract contains a lot of legalese, but it terrifies me to think that your average American does not understand that fixed rate and variable rate debt might contribute differently to one’s financial stability, or does not understand the role of collateral in a debt transaction.

    Terrifies me, but does not surprise me, because more and more people are just abdicating their financial responsibilities and turning them over to someone else that they perceive to be an authority in the matter. It isn’t just mortgages, but how to save for retirement, how to pay for a college education, etc. Why encourage this behavior further? However did the gap between the rich and everyone else develop in this country? Everyone elects a dictator.

  16. Bond Girl: You raise a good point about ignorance. But I think you are wrong about consumer protection being a red herring. Perhaps the issue is mislabeled. I think it boils down to ensuring the efficient functioning of markets with rules that prohibit the creation of information asymmetries designed to advantage one party over another. It’s Joe Stiglitz 101.

  17. The Brad Miller anecdote is a red herring. The Credit Card Act of 2009 eliminated double cycle billing. The CFPA will have nothing to do with it.

    The second “myth refutation’ is also misleading in three respects: first, it gives the impression that pre-approved plain vanilla contracts will replace existing documentation. But the CFPA will not repeal any existing laws, like TILA for instance. So no forms will be eliminated; merely another one will be added. Second, Warren poses a choice betweenexisting bureacucracy and her preferred bureaucracy. How about no bureaucracy? Simple laws like usury laws, stiff downpayment requirements and so forth could replace existing bureaucracy and would cost taxpayers less too. Finally note that evenin the plain vanilla forms, the most important terms, like rate and fees, are left blank. How does CFPA stop excessive debt? Not at all.

    We should throw this idea and the other failed consumer financial protection laws out and go with a national usury law, a national down payment law and a national cap on consumers’ debt to income ratio, with the burden on the lender to validate and certify to its prudential regulator that its extension of credit complied with each rule. Then we would stop excessive debt creation and avoid the cost to taxpayers of a bureaucracy.

  18. Lavrenti Beria

    You must be one of the PBS crowd referred to above that still believes that Jim Learer really isn’t a kind of rodent. :-)

    Elizabeth Warren will be given a voice only so long as she’s considered ineffectual. She’ll be more apt to be a victim of defenestration than the head of an agency that would actually threaten Regime perogatives in any important way. If you don’t believe me, just watch and see what changes come about as a result of Ron Paul’s efforts to audit the Federal Reserve. Its one thing to posture, even to declaim with honest intentions, quite another to be the classical schmendrik. And Warren is sufficiently naive to be this latter.

  19. Real reform is dead in the water. Democratic Congress is just window dressing. In the end they will gather up their fat checks from the health care and financial lobbyists and declare a great triumph for the American people. The President looks good in the window but guess what, that suit is not available for sale once you get inside.

  20. I think it’s a great day for “baseline” to have Professor Warren contributing to the site. Apparently some big newspapers only allow Bank CEOs to contribute their opinions. So the blog world has to do newspapers’ job for them. I guess newspapers are afraid to lose those bank advertisement revenue.

    The CFPA is a great idea whose time has come, and in fact is long overdue. Professor Warren (I want to call her “Miss” Warren ’cause I feel like she is the consumers’ friend) is a real hero. Why is it that many of the heros in this story are women??? Brooksley Born, Sheila Bair, Elizabeth Warren. Are there no men with the ba…. with the toughness required to fight against the banks???

    Many Americans support you Professor Warren. Make no doubt about it that many Americans are cheering you on Professor Warren. Lets bring back vanilla flavored financial products, and let’s bring back regulators who don’t play footsie with banks under the table.

    We want real regulators who ENFORCE the regulations.
    GO ELIZABETH WARREN!!!

  21. Elizabeth Warren for CFPA director (at least)! We have enough of regulators that didn’t like regulating.

  22. Apropos all of the Center for American Progress gunk above, does anyone know their funding breaks down? Is it mostly Soros money?

    And what is their budget? If you go to their webpage, which has a link to what they say is their 2007 annual report, not only don’t you get to see their 2008 annual report, but you don’t even get to see their 2007 report. The .pdf they have linked is their 2004-2005 report. Interesting tidbits? Lots of names…

    http://www.americanprogress.org/aboutus/files/annual_report_2004-2005.pdf

    …even Robert Solow of MIT is a trustee. He is/was also very involved with the Russell Sage Foundation, an offshoot of Alfred P. Sloan Foundation (Good friend of MIT and NBER) According to Wikipedia, Solow was influenced by Wasily Leontief, and Solow in turn was an influence on the very influential Joseph Stiglitz (who is being painted as the scorned underdog lately) Marion Sandler is a Director. It goes on and on… Aryeh Neier, Open Society Institute…Peter Lewis of Progressive Insurance. Get it… Progressive. Laura Tyson of the London Business School. (huh?) Melody Barnes, who is now Obama’s Director of the Domestic Policy Council. Peter Edelman, who is CoB for the Public Welfare Foundation (contributor to NBER).

    CAP is operating a huge PR machine. It’s said to be the most powerful & influential organization in the US today. They seem to be behind scores of econ and political blogs.

    A while back Krugman poo-poo’ed the idea that Soros was one of the evil geniuses behind our crash. Yet Krugman frequently dishes out cred to CAP-related bloggers and others.

    Soros was said to have “broken the Bank of England.” Did he help break the world this time? Was he assisted by Pete Peterson, who seems to be running his own stable of bloggers (including this one?) and influencers.

    Check out how Krugman carefully avoids using the name “Peterson” when he talks about the Peterson Institute here:

    http://krugman.blogs.nytimes.com/2009/07/18/summers-at-iie/

    Theorists, anything to add?

  23. Correction: Laura Tyson *was* the Dean of the London Busines School:

    http://en.wikipedia.org/wiki/Laura_Tyson

  24. Elizabeth:

    I am a huge fan of yours (http://tauntermedia.com/2009/06/18/financial-regulation/) and think you are doing a wonderful job advocating consumer protection.

    However, I have an easy explanation for this: “explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages.” The answer: because these exotic loans allowed customers to take on more debt than prime mortgages, and the customers wished to buy more expensive houses.

    Why did they want to buy more expensive houses? Well, a lot of reasons, some financially literate and some not. Many believed that real estate can only go up, or that renting is “throwing money away,” or that ownership is a mark of status, or that this gave them access to better school districts, or that they were due a bigger house. On some level it doesn’t really matter; it was their preference at the time. Had it worked (as it did spectacularly for people earlier in the cycle), you wouldn’t be seeing a lot of complaints about it.

    By all means, let’s get at the bizarre complexity and fraudulent practices (constantly changing payment locations, double-cycle billing, etc) of the credit industry. But pretending as though consumers – the broad mass of the American people – do not bear overwhelming responsibility for the credit crisis is completely disingenuous. Adults took on debt to buy things adults wanted. If they cannot service their debts, the debts should be discharged as part of a bankruptcy process that includes foreclosure.

  25. Uncle Billy vs. Mont Pelerin: “Please explain clearly why we need financial innovations. To compare them to medical advances is, to my simple mind, bizarre.”

    Haven’t you ever heard of the walletectomy? ;)

  26. Although I completely agree with the idea that consumers must bear responsibility for the debt they’ve incurred, one must also acknowledge that for many lenders the practice of collecting has thus far been “all or nothing.” There must be some compromise, don’t you think? If there aren’t assets to pay debt, lenders would prefer to write off the balance entirely than partly because it benefits them more. The recent news-inspiring “offers to reduce” credit card balances strike me as more making-up-rules-as-we-go-to-benefit-us than as a boon to the consumer. The bottom line is that no matter how responsible the borrower, the lender will always change the rules to win, if they can. If you look at the rate of default in terms of the larger market, certainly you must realize that to blame the consumer for the credit crisis is a bit of straw man–these debts were parceled out into investments on the order of one dollar to 100 (loosely, as there are formulas involved) promised to investors, and when they didn’t pay, those risks caused institution insolvency (simplified, of course). Remember this started with the “troubled assets?” That’s what makes the banks afraid to lend–not being able to make the previously bloated gobs of money on their book-keeping entries. The dollars on the ground, invested by irresponsible borrowers into homes with sinking values or inflated credit card balances, are really a small part of the larger picture, as mad as they might make some people. A mortgage should always be a win over the long term, this crisis is telling of the greed involved.

  27. You know, there used to be such a crime as usury, whatever happened to THAT?

  28. CAN SOMEONE EXPLAIN THE FLAWS OF GLASS-STEAGAL? Didn’t that provide a measure of protection for consumers until it was repealed under Clinton? Seems like the world went screwy when the banks could dabble in the shadows….

  29. Tony: “Innovation in the consumer financial products context means anything that makes a credit product a more effective and useful component of our lives.”

    Pardon me, Tony, but that begs the question.

  30. Daniel: ” Why not adopt the system employed in some other countries in which the balance must be paid off at the end of the month?”

    That’s how things used to be. Today, people can still pay off their balances every month. By and large, they do not. Is that because they do not know better? Maybe not.

  31. Although I respect your position on idealistic grounds, I would challenge it on practical grounds.

    There are several arguments against laissez faire in finance, but here are three that are relevant to this discussion:

    1) The transaction costs associated with acquiring information are steep, leading to information asymmetries. This means that companies (which process millions of contracts) have a distinct market advantage against others – this not only causes distributional inequities, but also leads to market inefficiencies (i.e. under-investment in good products, because consumers cannot distinguish between high and low quality products without expensive effort that simply is not justified, and therefore companies have no incentive to produce high quality products that consumers really would want if they could identify them).

    On the one hand, you accept that drugs should be regulated because they are complex, but reject that financial instruments are complex enough to be regulated. But YOU ANALYZE FINANCIAL INSTRUMENTS FOR A LIVING. For you, the cost of processing this information is low relative to others.

    2) One might expect that the market would compensate through competition, but Elizabeth correctly points out that competition only impacts outcomes along the dimensions in which it exists. There is no competition for quality in many credit cards because consumers can’t recognize likely impacts of disparate items, items are buried in fine print, and credit card companies routinely send fine-type “updates”… So even something that is high quality becomes degraded over time.

    Credit card companies spend significant effort researching where they can extract money from consumers _without them noticing_ at the time of application. Likewise, they deliberately try to create programs that sound very appealing but then make it very hard for consumers to redeem benefits (low benefit redemption rates are a GOOD thing for the bottom line). These are not aberrations – I assure you they are standard marketing practices.

    3) An effective CFPA would not even require command-and-control regulation of products. It could be extremely effective if it mandated strong disclosure requirements (fees listed on front page in large type, minimum-duration between fee changes listed, etc.) AND if it creates a consumer-friendly scoring system that had to be prominently displayed.

    For example, the Energy Star system (although it was severely b3stardized in that last 8 years) was extremely effective at helping consumers make decisions.

    Why can’t we have a FINANCIAL STAR SYSTEM?

    How would this type of transparency hurt the free market?

  32. Bond Girl: “I’m sorry, but “consumer protection” is one of the biggest red herrings in this whole debacle. Cracking down on outright fraud is one thing, but having the government pre-approve specific kinds of transactions? We are not talking about someone manufacturing a toxic drug in a bathtub here; we are talking about people’s capacity to make a decision for themselves, or lack thereof.”

    But fraud was rampant during the recent housing bubble. And a good part of that happened because consumers had no clue.

    “I’d guess that half of the people who ended up with non-traditional loans were speculators betting they could refi based on asset appreciation and the other half were just plain financially illiterate. Sure, even a plain vanilla mortgage contract contains a lot of legalese, but it terrifies me to think that your average American does not understand that fixed rate and variable rate debt might contribute differently to one’s financial stability, or does not understand the role of collateral in a debt transaction.”

    Sorry to terrify you, but I think it’s worse than that. :( American culture is innumerate. I will not belabor the point, as I have addressed it before on this blog.

    “Terrifies me, but does not surprise me, because more and more people are just abdicating their financial responsibilities and turning them over to someone else that they perceive to be an authority in the matter.”

    When I bought a house I hired a lawyer. I do not think that that was irresponsible. Back when American society was illiterate, people hired people to read for them. It is not irresponsible for people to rely upon experts, although there is a problem when the expert is on the other side of the transaction. Doctors and lawyers are licensed and have professional responsibilities towards their clients. They are not supposed to rip them off. Real estate agents are licensed, too. When you buy a house, shouldn’t you expect not to get ripped off?

  33. This is one of the greatest posts ever on Baselinescenario! I’ve PDFed it to keep it for future reference. In a few years I’ll check if the plans outlined here have become reality.

    E.W. :”By using an off-the-shelf template for a plain vanilla contracts and filling in the blanks for interest rates, penalty rates and a few other key terms, a financial institution can legally satisfy all its federal regulatory requirements—no need to do more.”

    This is my dream come true: extreme simplification and standardization! Who has the time, expertise and concentration to read the whole damn fine print?

    E.W. :”The regulators’ budget comes in large part from the institutions they regulate. If a big financial institution leaves one regulator, the agency will face a budget shortfall and the agency will likely shrink. Knowing this, financial institutions can shop around for the regulator that provides the most lax oversight, and regulators can compete by offering to regulate less.”

    What about the CFPA? Will a significant part of its budget also come from financial institutions?

    What about revolving doors? What if a JP Morgan Chase alumnus becomes head of the CFPA? What if a CFPA employee is lax with some big bank and then goes to work for it at a high salary?

    Elizabeth Warren for Secretary of Treasury?
    No! Elizabeth Warren for PRESIDENT!

  34. and the FTC can’t handle this, why? Give them the power.

  35. Ted K: “The CFPA is a great idea whose time has come, and in fact is long overdue. Professor Warren (I want to call her “Miss” Warren ’cause I feel like she is the consumers’ friend) is a real hero. Why is it that many of the heros in this story are women??? Brooksley Born, Sheila Bair, Elizabeth Warren. Are there no men with the ba…. with the toughness required to fight against the banks???”

    I think that a lot of it has to do with world-view. Also, for most men cojones does not mean losing a duel with Alan Greenspan, but bring in a big bonus. One man who locked horns with Greenspan was William White. See http://www.spiegel.de/international/business/0,1518,635051,00.html . :)

  36. I agree that adults took on too much debt and should be held accountable – but let’s not limit accountability only to the consumer sector.

    Financial firms that took on too much debt and tanked the economy should be held accountable for their terrible business errors. Yet what do we see instead? Billions of TARP dollars going to their bonus pool.

    And GS seems to believe that their “success” this quarter is due to their genius, when instead, they’ve benefited from some of the most extraordinary federal interventions that the ‘free market’ has ever seen. But that profit they’re reporting? It’s all theirs…

    Consumers are being held accountable for their debts – foreclosures continue to rise. But within the financial sector – I do not see them held accountable for anything.

  37. Annie: “You know, there used to be such a crime as usury, whatever happened to THAT?”

    Repealed under Carter. (!) :( Another one of those financial innovations.

  38. Here’s Laura D’Andrea Tyson again, on the board at the Peterson Institute.

    http://www.iie.com/institute/board.cfm

    Read those names. Look up each and every one of them.

    Barry Eichengreen is in there too, at the veeeery bottom, “Ex Officio”

  39. I certainly agree with you on the financial sector – I was and remain opposed to any government intervention that did not require the shareholders and long-term creditors to suffer the first loss, and I continue to believe that ending mark-to-market was a tremendous mistake.

  40. Damn I like hearing from her. What a refreshing sound in a sea of stale rhetoric and lame cliches.

  41. Lavrenti Beria

    Well, Annie, usury went the way of all flesh at roughly the same time that child murder and homosexual relationships were given a governmental wink and nod in Western civilization, that is to say over a span of perhaps fifty to eighty years, depending on the locale. And since the prohibition of usury, abortion and homosexual relations were all based upon religious or moral tenets, you may want to consider calling for the reintroduction of tolerance for religion and for free speech for religious folks here and elsewhere. But if so, you may want to conceal your identity at first. The terribly unintrusive and sensitive folks at ACT UP might want to bring a little muscle to bear.

  42. Why stop with mortgages, StatsGuy? Stocks and bonds are complicated (as you noted, people make careers out of analyzing them). People can lose money. Stockbrokers are clever and they will talk people into investments so they can earn a commission. Clearly the government should rate stocks and bonds, maybe assign them a number of stars, so people can tell which ones are “safe” for their retirement accounts. I mean, there are costs associated with learning about these things. In fact, why stop with finance – people should not have to make a decision about anything they do not specialize in.

    Buying a house is perhaps the largest investment most people will make in their lifetime. They should understand and participate in the transaction or be comfortable renting. I’m not sure why we spend so much money on public education in this country trying to give people basic skills when people come up with ideas like this.

  43. Apologies in advance — thinking out loud here. Some China connections…

    Laura D’Andrea Tyson is also a sr. adviser at the “Asia Society” per this link:

    http://www.asiasociety.org/policy-politics/task-forces/a-roadmap-us-china-cooperation-energy-and-climate-change

    Her chair at the Haas School at Berkeley is endowed by the Chan family, very old money family from Guangzhou originally.

    *********

    And then there’s the Bellagio Group. This is reported to have been the predecessor the the “Group of 30,” which includes Krugman and Volcker and a host of other interesting characters. Seems inevitable that the Bellagio Group is tied to the Rockefeller Bellagio Center at Lake Como. Op.. there’s Rockefeller again… remember Parsons?

    According to this, Barry Eichengree was the “convener” of the Bellagio Group:

    http://emlab.berkeley.edu/users/eichengr/biosketch.html

    According to this, it looks like the Bellagio Group still exists, and didn’t morph into the Group of 30?

    http://www.nabe.com/pc09/session11.html

    The Morris Goldstein mentioned in the above link was coauthor with two people mentioned recently in one of Krugman’s blog posts — Graciela Kaminsky and Carmen Reinhart — of “of Assessing Financial Vulnerability: An early warning system for emerging Markets (2000) (http://www.iie.com/staff/author_bio.cfm?author_id=10)

    Also Morris Goldstein at Peterson… ” project director of Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture (1999) for the Council on Foreign Relations Task Force on the International Financial Architecture” Guess that didn’t work out too well, huh.

    Stray notes:

    Goldstein did a lot of work with Jacob Frenkel, AIG

    Chair of group of 30. http://en.wikipedia.org/wiki/Group_of_Thirty

    “The Group of Thirty was founded in 1978 by Geoffrey Bell at the initiative of the Rockefeller Foundation,[2] which also provided initial funding for the body. Its first chairman was Johannes Witteveen, the former managing director of the International Monetary Fund. Its current chairman of trustees is Paul Volcker.”

    “The Bellagio Group, formed by Austrian economist Fritz Machlup, was the immediate predecessor to the Group of Thirty.[3] It first met in 1963, to investigate international currency problems, particularly the balance of payments crisis”

    Machlup was Austrian “knowledge as an economic resource” So he was asked to start Bellagio by Rockellers… His Doctoral Adiser was Ludwig Von Mises! (dissertation was “The Gold Standard) (Does this make the group of 30 Austrian too? Didn’t Eichengreen talk a lot about the gold standard?)

    http://en.wikipedia.org/wiki/Fritz_Machlup

    Machlup advised Merton Miller and John Williamson. Merton Miller went through LSE and U Chicago. Advised Fama, Michael Jensen, Richard Roll, and Myron Scholes. Fama is hardcore Chicago school. (Father of the efficient market hypothesis…ech). Director of a fund where son is veep. Deutsche Bank likes him, gave him prize (pimco/bond stuff?)

    http://en.wikipedia.org/wiki/Group_of_Thirty

    http://www.group30.org/members.htm (compare with old list. Why changes?)

    Stuart P.M. Mackintosh, Scottish, Newcastle upon Tyne and Edinburgh U. On board of “spooky” theater in MD.

    Geoffrey Bell: LSE, British Treasury, Founded group of 30 at invite of Rockefeller Foundation.

    http://en.wikipedia.org/wiki/Geoffrey_Bell

    Was affiliated with Schroders which “played a leading role in the privatisations carried out by the UK Government in the 1980s”

    http://en.wikipedia.org/wiki/Schroders

    “The Bellagio Group, formed by Austrian economist Fritz Machlup, was the immediate predecessor to the Group of Thirty.[3] It first met in 1963, to investigate international currency problems, particularly the balance of payments crisis which America faced throughout the early 1960s.

    http://www.rockfound.org/bellagio/bellagio.shtml

    http://en.wikipedia.org/wiki/Rockefeller_Foundation

    U. Chicago, IMF, Bank of Israel, Merril, AIG.

    “Frenkel’s lucrative compensation as the vice chairman of AIG and his repeat preaching on the elasticity of the global financial system that have proved false in the 2008 financial system crash are viewed by many to symbolize the short-sightedness and greed spread throughout Wall Street over the recent years.”

  44. Another screed lost, probably due to comment size limits.

    In short — Research Tyson and her China ties. Her Chair at Haas was endowed with $500k by very wealthy old money family hailing from Guangzhou. She’s an adviser to “Asia” something or other with people like Henry Kissinger.

    Then there’s the whole Bellagio Group thread with Morris Goldstein and Barry Eichengreen, and the Rockefellers again. Graciela Kaminsky, Carmen Reinhart worked on some interesting things with Goldstein. Some of it pretty ironic from where we’re standing now.

  45. Very well argued. Thank you.

  46. Bond Girl: “Stockbrokers are clever and they will talk people into investments so they can earn a commission.”

    That happens, but stockbrokers do have some fiduciary responsibility. IIRC, Merrill Lynch was sued in ’87 by a widow whose ML broker put all her savings in calls before the crash. ML settled quickly.

  47. markets.aurelius

    WOW!

    Read the post. Watched the youtube post. WOW! This is great stuff. Go, Elizabeth!

    James, Simon: Well done. Thank you.

  48. Bond Girl: “I’m not sure why we spend so much money on public education in this country trying to give people basic skills when people come up with ideas like this.”

    Sorry to be cynical, but the main thing that we teach our kids in school is to be quiet, to be on time, and to follow orders. So they can be good little economic slaves. Teach them to be independent thinkers? Then they might question authority. We can’t have that. Inculcate American values, such as free speech? That’s a no-no, says the Supreme Court.

  49. Uber Regulator is a red herring. We had one (he’s the Chairman of the Fed), he just had an ideology based bias. Replacing one uber with another doesn’t give me much hope.

    Myth 1: Uber regulators will solve our problems

    Myth 2: There’s such a thing as a “plain vanilla contract” that is both “short” and sufficiently detailed to cover the exigencies. Not so long as Warren and her ilk keep cranking out more lawyers, there’s not.

    Myth 3: We lack sufficient regulation requiring disclosures. Have you signed a mortgage in your life?

    Myth 4: Warren is interested in consumer “protection” from lenders. Reality: Warren is an ideologue who opposes almost all forms of consumer debt. Fine. Live your life that way. I’ll take the ability and freedom that comes with flattening my consumption curve via debt, thx.

    Myth 5: The lack of consumer “protection” has anything at all to do with the causes of this financial collapse.

  50. CBS from the West

    Actually, it’s usually referred to as a wallet biopsy.

  51. Impartial Observer

    As best as I can understand Ms. Warren’s arguments, it goes as follows:

    1) current regulators are not doing their jobs

    2) therefore, we need a new set of regulations and regulators

    Can’t we just get the regulators who aren’t doing their jobs to do their jobs?

    Also: am I the only individual who finds it unseemly that Ms. Warren is strenuously lobbying to get herself on the public payroll by insisting a new job must be created?

  52. Jonathan Watmough

    There are many areas of American life where these simple principles could be applied.

    1. Cell Phone plans.
    2. Energy billing.
    3. Healthcare.

    All three of the aforementioned are ‘confusopolies’, where true consumer choice is frustrated by legalese and unclear terms and conditions.

    If Elizabeth Warren can bring us CFPA, maybe some other smart people on the side of consumers can bring us appropriate regulations on other important areas.

  53. DesolationRow

    Excellent point Min. I was thinking the same thing as I read “more and more people are just abdicating their financial responsibilities and turning them over to someone else that they perceive to be an authority in the matter.”. There are alot of people who see their local mortgage broker as their expert in getting them a loan just as they see their doctor as their expert in mending a broken bone. I hope the cynical factor has been kicked up in people after this because I see a legion of “Loan Modification Agents” foaming at the mouth.

  54. Point by point:

    1) Mortgages and credit cards, much like cars, are so embedded in the structure of society that it’s nearly impossible to participate without them. You can, however, live your life and die without ever owning a stock.

    The free market exists to support a thriving society. Society does not exist to support a thriving free market.

    2) The government _does_ rate bonds and other securities – it simply outsourced the rating system to three private agencies. I say outsourced, because the ratings systems that are run by private companies were given the force of law by the government in determing things like minimum capital threshholds.

    This “privatized” rating system failed because of bad incentives – demonstrating just how well private industry “self-regulates” when vast profits are on the line. If any system is given the force of law, it should be regulated by law.

    3) The SEC _already_ regulates stocks.

    Disclosure and filing rules, for example, are mandated. Part of the privilege of being granted the status of a corporation which issues stock involves accepting certain rules. Mutual funds are required to release holdings periodically. SEC is charged with investigating fraud, and when it fails (e.g. Madoff) very bad things happen. Are you seriously suggesting we disband the SEC, since it’s part of the “nanny state”?

    4) Min covered the point on litigating dishonest stockbrokers pretty well.

    Finally, I’ll end with this – most taxpayers are livid at Wall Street NOT just because we had to bail them out (and I certainly believe we did), but rather because we are now told that only weak-willed dull-witted pansies want government to interfere in finance. (A classic Ayn Rand attack line.)

    So bankers hate government intervention… except when they want a bailout. They have the power to CREATE MONEY, which is backed by the full faith and power of the federal government (including the military), and they want to wield this power unhampered by regulation. That is a recipe for oligarchy.

    So I propose a solution to this libertarian crisis of conscience: All banks and financial institutions and companies that issue stock be given a _free_ choice.

    Option A) They get total freedom from government interference. TOTAL freedom.

    The government has no power to prosecute them if they commit financial fraud (fraud must be prosecuted in individual court cases). Bondholders have no power to compel disclosure, except by litigating individually (not class action, since that’s a non-common-law form of tort action) through civil courts. They are not required to meet reporting standards. They cannot borrow from the Federal reserve. They do not participate in FDIC. Treasury has no power to audit their books and confirm the existence/value of their assets. If a bank, it has no capital/asset ratios at all. I don’t know how it clears accounts eletronically or participates in the Bank of International Settlements, but the private market will surely find a solution. (Perhaps it operates entirely through vault cash?)

    Option B) The company can accept regulation as it currently stands.

    How many companies do you think would take option A? And would you, Bond Girl, buy the bonds of a company that has no disclosure requirements?

  55. Lavrenti,

    Hmmm, I can’t tell if you are deeply in the employ of snarkiness or distraught with the outcomes of moral relativism. Possibly both? Either way, the government on many levels continues to uphold laws pertaining to sexuality and abortion, it just doesn’t seem all that interested in it’s citizenry when it comes to robbers robbing them of their finances as long as the robbers were already rich. (Madoff of course, being the convenient lodestar for public outrage). And I know some of the original ACT UP folk, if it’s the AIDS activists you are referencing–sure they might be *republican expletive expletive expletives* insert your designation at will, but I do believe that they were fighting for one thing we all want–human decency and respect. Isn’t that what this conversation wants as well?

  56. In agreement with others above, thank you for writing this post.

  57. I would heartedly agree with most in this post, except that it forgot to make clear that the greatest myth of them all might be that consumer finance as such is good.

    As I see it no person who accelerates unnecessary consumption paying interest rates over the risk free rate is benefiting since that will normally make him poorer.

  58. I wanna say DOUBLE KUDOS to Simon Johnson and James Kwak for getting Elizabeth Warren on the blog. The readers of the blog appreciate Professor Warren and her hard work for consumers very much. For her to take the time on this blog when she has so many responsibilities with her students and the work she has done with Congress. We’re very grateful, and hope Professor Warren can make many more posts in the future.

    YAY!!! Professor Warren!!! YAY!!! (He said, then self-conscious, hid his pompoms behind his back)

  59. You both should re-read the agreements you signed when you opened your brokerage accounts; I think you have very generous opinions about your rights :)

    Are you suggesting that there are no disclosure requirements for these financial instruments right now? How do you think their notoriously excessive documentation evolved? I am not against disclosure in general at all. But the CFPA concept goes well beyond disclosure.

    I disagree with your point about the rating agencies if only because we are talking about what is available to indiviudals making an investment decision, not capital requirements (although one would rightly argue those are ultimately a form of consumer protection).

    Can you explain what you believe an individual’s responsibilities are in making a financial decision? Where do you draw the line between the government protecting consumers from banks and the government protecting consumers from their own bad decisions?

    You are setting up a straw-man argument if you think I am saying that “only weak-willed dull-witted pansies want government to interfere in finance.” On the contrary, I am arguing that we should not condone financial illiteracy or poor decision-making by institutionalizing the deference to authority.

  60. It’s ironic that some will argue for the natural efficiency of unregulated markets, while in the same arguing that consumers are ignorant or irrational. If consumers are irrational actors, then markets will, as a rule, not be efficient. But if one has a more realistic conception of consumer behavior, as Professor Warren appears to, then one realizes that what consumers lack is not intelligence, but digestible information.

  61. I heart you, Elizabeth Warren.

  62. I like “confusopoly”!

    Cell phone plans are definitely too complex for people to understand- even the people who sell them often can’t figure out the total cost of ownership. But the game is slightly different.

    The phone plans are trying to get you to use more than you otherwise would and so have a somewhat bigger bill to pay at the end of the month: maybe $70 instead of $100. Credit card companies are trying to build their assets, which they do if you don’t pay off your whole balance, let the balance accumulate and agree to repay it at a higher rate. The best outcome for them is one that is very bad for you- they have a large and even growing medium/long-term debt with a high return, which equates to a high and growing debt medium/long-term debt burden for the consumer.

    To me, the credit card situation is much more insidious and harmful.

  63. bungalowbill

    It looks like some people making a living deciphering legalese feel impelled to defend it.

    Well, other people have better things to do with their time than learn a second language that’s not even useful when traveling.

    Life’s too short, my friends!

  64. Bond Girl: “I am not against disclosure in general at all. But the CFPA concept goes well beyond disclosure.”

    Well, there is disclosure and there is disclosure. I am sure that you know what hypertension means, but a lot of people think that it means getting uptight. It is possible to meet disclosure requirements in such a way as to mislead. Simply requiring disclosure is not enough.

    ” I am arguing that we should not condone financial illiteracy or poor decision-making by institutionalizing the deference to authority.”

    IIUC, one of the basic assumptions of a free market is that market transactions between two parties benefit both, as a rule; it is not zero sum, it is win-win. That is part of the social justification for free markets. Allow one party to benefit at the expense of the other on a regular basis and the social justification for the market evaporates. Caveat emptor is a good rule for individuals, but a bad rule for societies.

    As you know, I am with you on financial illiteracy and innumeracy, and on deference to authority. Unfortunately, our schools promote deference to authority and fail to teach numeracy and financial literacy. What are you going to do, sue the school board?

    As we have discovered recently (if we did not already know) even sophisticated investors can make horrendous mistakes with unfamiliar, complex, opaque financial instruments. It took both the housing bubble and the tremendous amplification of risk via those instruments to produce our current crisis. Fraud and stupidity played a part in both aspects. Would better consumer protection have prevented the debacle? Probably not, but it would have helped to keep ordinary innumerate and financially illiterate people from being fooled and defrauded, and that would have mitigated the disaster.

    This crisis has highlighted a systemic problem with information asymmetries between financial institutions and consumers. Ultimately the answer lies with education. Meanwhile we can, and should level the playing field to promote win-win transactions between the two.

  65. myth_maker: “Uber Regulator” is a red herring.”

    Why take the Ueber Regulator from the financial industry? The UR will have many intelligent and knowledgeable advisors. The UR should be somebody who means what they say and will carry through, two traits that are not associated with financial gurus. My vote goes to Arnold Schwarzenegger. :) He’ll whip those girly-men into line.

  66. You forgot one thing: we also teach kids to look to authority to assign rewards and punishments, and to look to others for validatation.

    That is a very important lesson that we teach in school.

  67. But the American Dream is in buying things we don’t need and don’t really want using money we don’t have!

    Anything else would be communism!

  68. It’s ironic that some will argue for the natural efficiency of unregulated markets

  69. Elizabeth Warren, thank you so much! You are the champion we need at this time. Thank you Simon for posting her blog. In spite of what some bloggers here suggest, I think you will be heard on this very important issue of telling the truth. Yes, that is really all it is that we are talking about: telling the truth. “Oh, what tangled webs we weave when we first practice to deceive.” Although there were many players on this stage of “meltdown”, none of it could have happened if people had simply told the truth! Since those highly paid “responsible” individuals who one would think would tell the truth have not and do not tell the truth, CFPA is necessary. Obfuscation is not telling the truth! And financial regulation is necessary. And breaking up TBTF is necessary. And removing all financial regulation from the Fed is necessary. What I’ve learned of financial corporations and culture these last nine months or so, tells me that the world of finance is fundamentally based on not telling the truth. So, thank you EW, maybe through your efforts, and many others, the world of finance will one day speak the truth.

  70. Lavrenti Beria

    Hi Annie,

    “And I know some of the original ACT UP folk … but I do believe that they were fighting for one thing we all want–human decency and respect.”

    Yeah, we noticed how much they were all-out champions of human dignity when they were desacrating consecrated hosts, throwing them on the floor and purposefully stepping on them at Mass at St. Pats. It was hard to miss the respect. Perhaps these are some of the folks you know. They certainly haven’t been forgotten here. Its hard to forget an encounter with thugs that emulate and employ the tactics of the Sturm Abteilung, even if they’re not wearing brown shirts and arm bands.

    But if you’ve read any of the posts I’ve made here over the last several weeks, you’d know that I share your concern both with the bacteria that own our political life and the resident reptiles that make it possible for them to do so. Actually, to me they look just like those Ernst Rhoem devotees over at ACT UP with whom you’re familiar. You’ll understand, of course, that even for a moral relativist, its hard to distinguish one form of pond scum from another. :-)

  71. William: “Although there were many players on this stage of “meltdown”, none of it could have happened if people had simply told the truth!”

    Wrong! You are implying that someone lied, which was not necessarily so. The real problem starts when the regulators endorsed so much the credit rating agencies and basically told the markets that “the credit rating agencies, they are bearers of the truth” The credit rating agencies have been around for almost a hundred years and they were just one more minor player in the market until the bank regulators in Basel (primarily in June 2004) made them The One and Only Royal Purveyor of Risk Assessments.

    If it is impossible for the credit rating agencies to have the truth, how come regulators induce the markets to believe it is so?

    If there had been no SEC there would have been no Madoff!

  72. When I was a boy, I used to hang around a golf course alot, golfing, search for missing balls in the woods and generally goofing off. (My mother had some connections). The people who were playing were the wealthy people in the neighborhood; mainly doctors, engineers, business people (think Caddyshack). As I got older, I continued golfing … a couple years back, the people who frequent these places seemed to change alittle bit. Now it seems that it is mainly hedge fund managers/ real estate-stock jobbers, etc.,.

    My point is that the composion of wealth in this nation has changed. Innovation/ true relevant work is not rewarded to the degree that it once was, and instead we are largely left with an oligopoly of people who push around little slips of paper. This is a parasitic relationship. And its formation is the reason why, as one commenter above noted, that the middle class is hanging by a thread. I think people like Ms. Warren are great heroes to the cause.

  73. Almost too good to be true, right? Honest, loveable, mother-like…

    Think about who might be using her, and why.

  74. People with a good heart and bad information are the greatest threat to society. Prof Warren is one of them. She definetely needs some training in economics.

  75. “On the contrary, I am arguing that we should not condone financial illiteracy or poor decision-making by institutionalizing the deference to authority.”

    Undoubtedly true.

    “Where do you draw the line between the government protecting consumers from banks and the government protecting consumers from their own bad decisions?”

    Bright lines are hard to draw. I am a pragmatist, and do believe in cost/benefit analysis where it can be applied. So, generally, the answer is where the benefits of disclosure requirements outweigh the costs. The question is who arbitrates this decision? And recent history seems to show that unless we have an agency that is independent of (and, perhaps, slightly antagonistic to) the industry it is regulating, we end up with regulation that errs on the weak side – perhaps, even, regulation that favors and protects the industry.

    I know this is not a satisfactory answer on moral grounds…

  76. So come rain or come shine Paracelsus plays golf (sorry could not resist it)

  77. The danger with financial literacy programs. They usually start with the “A”… as in AAA http://bit.ly/1wj8V

  78. bungalowbill

    Paracelsus,

    that sure was some interesting observation you made! I can picture physicians in a country club, but never in my life could I have imagined an engineer hobnobbing on a golf course.

    Aren’t those guys supposed to be unsociable nerds? At least that’s their public image now. And you raise the possibility that it was not always so. Wow! Do I need to revise my worldview?

  79. The New Yorker’s James Surowiecki’s view on the CFPA:

    http://www.newyorker.com/talk/financial/2009/07/06/090706ta_talk_surowiecki

    Some excerpts:

    “Consumer finance, in other words, is an industry in which keeping customers confused often seems to be a business strategy.”

    “But transparency isn’t always enough; there are some consumer-finance products whose costs so vastly outweigh their benefits that they should probably just be banned. Take yield-spread premiums: these allow mortgage brokers to make more if they arrange loans with higher interest rates, giving them an incentive to stick their customers with more expensive loans.”

    “In any case, the biggest danger of a Consumer Financial Protection Agency is not that it will artificially limit risk-taking. Rather, it’s that giving products a government imprimatur can make people feel safer than they really are.”

  80. That was a super good article by Surowiecki. I get The New Yorker through the old “snail mail”. It feels so good to turn the pages. I should have given a link to that earlier. Great stuff “BlackSwan”.

  81. Why is a whole new agency needed when all they have to do is give back the power they took away from the agencies that wanted to and tried to do something about all this?

    http://www.fdic.gov/quicklinks/consumers.html

    http://www.fdic.gov/consumers/consumer/moneysmart/index.html

    http://www.fdic.gov/consumers/consumer/predatorylending/

  82. Jonathan Watmough

    Thanks, but I should have credited Scott Adams with coining ‘confusopoly’. Better now than not.

    You make a good point on CC companies. Similarly, it seems insane, but pay option ARMs actually *earned money* for banks since deferred interest on mortgages (when people did not even pay interest) was added to principal and was counted as an *increase* in assets, counted as income!

    Of course, without regular monitoring of the loans, a massive increase in risk of mortgage default went unnoticed until things started breaking.

  83. It is nice to read that at least someone out here besides myself, realizes that the Energy Star really doesn’t mean that the item meets all applicable standards.

  84. Michael LittleBig

    This new agency (Consumer Protection) I am afraid will be like all the other regulators. A hollow shallow government feel good fairy tale.
    I lost my home of 7 years on foreclosure. I could not continue my counter claim lawsuit because I ran out of money.
    I would still be in my home today had the Office of Thrift Supervision carried out their responsibilities as a federal regulator.
    My elected officials state and federal refused to help me. I learned that there are NO laws to give the mortgage borrower a voice in fighting their foreclosure. That is because the Congress has by design refused legislate a level playing field for the borrower.
    Here my last request of many to the Office of Thrift Supervision requesting information as to why they permitted the foreclosure based on the violations by the banks.
    In any case Professor Warren , too little too late for millions and millions of us.
    Like the Jewish people when they talk about their holocaust, the millions and millions of us in our foreclosure holocaust will never forget. The unethical win again.
    ———————————————————————————————
    May 18, 2009
    Daniel T McKee, Acting Regional Director
    Office of Thrift Supervision
    One South Wacker Drive
    Suite 2000
    Chicago, IL 60606
    Dear Mr. McKee:
    RE: OTS Case 010758 2006 and AmTrust Bank, FDIC Certificate 29776
    Please honor my requests which are being made pursuant to the FOIA – 5 USC 552 or the Department of the Treasury regulations.
    We are individuals requesting the following information regarding the investigation of our OTS case 010758. We lost our home of 7 years which was sold at foreclosure on 03-17-2008 based on an unethical complaint by AmTrust Bank (f/k/a Ohio Savings Bank).
    We have two requests:
    1. A copy of the Office of Thrift Supervision investigative records for each one of the 10 categories where we allege AmTrust Bank committed violations as described in the attached
    “Information Request Package” in explicit detail under the section Details of AmTrust Bank Violations.
    Those 10 categories of AmTrust violations are:
    1. 05-23-2002 – 2nd Mortgage Loan HELOC Increase
    2. 03-2003 and 05-2005 Loan Requests: Loan Purpose
    3. 03-2003 and 05-2005 Mortgage Appraisals Required
    4. 03-2003 Mortgage Loan Rewrite Request Denial based on Loan-to-Value Ratio
    5. 03-2003 Mortgage Loan Denial based on Flawed Appraisal
    6. 03-2003 Loan Credit Denial Notification
    7. 2003 Homeowners Insurance – Ethics and Competency
    8. 05-2005 Mortgage Loan Denial based on a Cancelled Appraisal
    9. 05-2005 Appraisal Fee Required for a Cancelled Appraisal
    10. 2005 and 2006: Consumer Reporting Act (Fair Credit Reporting Act)
    We believe that we are entitled to copies of these investigative records concerning these 10 categories of violations based on the fact that the Office of Thrift Supervision has the direct responsibility of supervising, regulating and enforcing those rules, laws and regulations governing AmTrust Bank’s mortgage lending operations – who filed foreclosure against us based on an unethical complaint against us.
    Furthermore, Richard E. Denby, Manager Consumer programs, Jersey City, NJ stated in writing on 12-14-2006 and again on 12-21-2006 that the violations committed by AmTrust Bank as brought forth by us in our original complaint of 07-24-06 (with updates of those violations on 11-06-2006 and 04-26-2007) would be referred to the OTS examinations staff. On 02-12-2007 Montrice Yakimov stated in writing “that consumer complaints are a factor in our examination process”. On 06-18-2007 U.S. Attorney Christian Stickan stated that our issues were strictly regulatory and could only be addressed by the OTS. Accordingly the OTS closed our file without even the courtesy of informing us of their investigative results of the violations in our complaint or even the fact they had closed our case.
    2. A copy of the OTS citation for a Truth in Lending violation by AmTrust Bank
    (f/k/a Ohio Savings Bank) concerning the manipulation of mortgage interest calculations as outlined in a class action lawsuit that was filed in Cleveland, Ohio, Cuyahoga County Common Peas Court “ Hamilton vs Ohio Saving Bank” case # 86378 CV 1985. This case was settled 09-07-2007 for a cash payment by AmTrust Bank for 14 million dollars which the court approved dispersal of in early 2008. This case was stated to have affected 27,000 borrowers.
    Our reason to locate this TILA violation citation would support our contention that there is an unethical pattern of behavior by AmTrust Bank as we have specifically detailed in many of the violations in this Request Package and in our OTS complaints. With all due respect to the OTS, if there was no citation issued for this TILA violation to AmTrust Bank then this would support our belief that there was little, if any, investigation of our complaints by the OTS.
    We can appreciate that the OTS did issue a Cease and Desist Order No. CN 08-15 against AmTrust Bank dated 11-19-2008; however as we understand it was for different issues than what we have addressed.
    We certainly would appreciate your cooperation and consideration in producing the documents that we have requested so that we may understand why we lost our home in foreclosure to AmTrust Bank – a bank that committed violations of law that forced us to seek federal protection in the U.S. Bankruptcy Court.
    Sincerely,
    The Office of Thrift Supervision has never answered this letter.
    Michael LittleBig
    POB 16588
    Rocky River OH 44116

  85. Bond Girl – it appears your taking a fair amount of heat here for your comment, but then there is no debate without an opposing/differing view.

    “I’d guess that half of the people who ended up with non-traditional loans were speculators” or “just plain financially illiterate.”

    This is like the burglar blaming his victim for his actions. If they had not left the window unlocked, I would not have stolen from him or her. I simply could not help pushing loans with detrimental terms on someone too “financially illiterate” to know that I screwed him or her.

    Making such loans to people that as you describe, were “financially illiterate,” would be considered illegal usury in all 50 States and in many foreign countries if the intent of that person were to knowingly take advantage of someone’s lack of knowledge to their financial detriment, to enrich one’s own financial condition. If everyone were sophisticated or smart enough to avoid being conned, swindled, defrauded, etc…, then these words or the meanings thereof would not exist, nor would any laws against such conduct.

    A case of the pot calling the kettle black – I would speculate that someone calling people that took non-traditional loans speculators or simply plain financially illiterate, are speculating that half the people with non-traditional loans were speculating that they could “refi” later and that the “other half were just plain financially illiterate.”

    A dose of reality – non-traditional loans were making lenders’ “fat and comfortable lives even fatter and more comfortable” (TJ). There is no law or rule against making loans with better terms to people that would not qualify under this system for better terms – this goes to competition – there was none. Unless of course, figuring out how to screw people without them knowing until it is too late is what is meant by competition.

    Lenders/bankers have stated that they pushed refinance as a means to mitigate borrower apprehension regarding significantly unfavorable loan terms in these non-traditional loans. Lenders/bankers have stated that they saw no reason why the borrower would not simply refinance before such loan terms kicked in. They have stated that they simply could not imagine equity crashing through the floor, thereby making it impossible for most to “refi.”. With this said, it would seem that the bankers or lenders are equally guilty of speculating that the borrower would simply “refi.”

  86. Per: If the SEC’s job was to regulate the credit rating agencies during 2001-2008 then the SEC did not tell the truth to the American people because the SEC essentially told us that everything was fine with the rating agencies. The credit rating agencies did not tell the truth because they allowed the bond issuers to influence their ratings. I should note that I think the changes underway at the SEC under the leadership of Mary Schapiro are moving in the right direction.

  87. William “The credit rating agencies did not tell the truth because they allowed the bond issuers to influence their ratings.”

    Yes and no. Of course they were influenced but I sincerely do not think they lied. They are just made up of fallible human beings, which is why it is so crazy to give them so much power. Currently there are more financial courses on learning to analyze the possible change of credit ratings for a borrower than there are on learning to analyze the borrower… that is how crazy it is getting to be.

  88. anti_fascist_freedom_fighter

    Tony must be working for Chase. If we look at the collateralization of mortgages into tranched securitized debt obligations and other “innovative” so-called “financial products” – I think we can define “innovation” to mean “hucksterism” at every level – from the borrower who gets suckered by the mortgage broker pitching ludicrously expensive loans and charging outrageous and unconscionable fees, to the “investors” who packaged the junk into multi-tiered fraudulent investments and sold them to the rubes at hedge funds and German Banks. To think that Banks, who get 30% for credit card debt could possibly face bankruptcy – hell, that’s only possible if the crooks are shoveling the money out the door and into their own pockets. Shut them all down, break them up and then never again let an investment bank merge with a commercial bank. Oh, and line up all these sociopath bankers on Wall Street, Tim Geithner at the front of the line, and shoot them. And shoot their offspring. They should not be allowed to breed.

  89. “Daniel Carpenter…at Harvard University … has written a great deal about the modern pharmaceutical industry. While anyone with a bathtub and some chemicals could be a drug manufacturer a century ago, drug companies were willing to invest far more in research and development … once FDA regulations drove out bad drugs and useless drugs. Good regulations support product innovation.”

    Professor Warren makes a very important point here which is often overlooked, and whose importance is often underestimated.

    I can tell you as a successful businessman, entrepreneur, and salesman that without sufficient government regulation (which is in many cases not that possible, but still often is highly possible) a business or salesperson can be at a substantial, or huge, disadvantage against competitors who are willing to do deceptively harmful or poor value things to customers. Often these things are very profitable because the customer cannot find out he was harmed, or received a poor value, until long after the sale, if ever.

    Such unethical competitors, without government regulation or supervision, can drive out of the business the ethical ones. Leaving only, or predominantly, unethical, or ethically willing to compromise, competitors. They may be the only ones who can survive against competitors who have the advantage of these unethical means, which again can in many cases be a big advantage in luring customers and increasing profits. CEOs who don’t use these measures and thus have much lower profits will have a hard time keeping their jobs and reputations (for making money). And don’t try giving me long run arguments; often these unethical methods maximize profit over the long run too. Moreover, how often do you see CEOs evaluated over decades. Usually a few bad years, especially much worse then their competitiors, even if those competitors are much less ethical, puts them in substantial danger of losing their super high paying jobs and never getting other ones nearly as high paying or prestigious.

    This is clearly horrible for consumers, efficiency, and total societal utility. Much of the innovation and choice is in clever ways to better and more deceptively rip-off the customers.

    For more on this, see my post, “More precisely, it’s “Guys who LOOK nice finish first”, at: http://richardhserlin.blogspot.com/2008/10/more-precisely-its-guys-who-look-nice.html .

  90. Yep. This, essentially, is the information assymetry argument in the real world.

  91. Thanks for pulling this out of the spamheap. You may now send in the black helio-copters, piloted by freemasons.

  92. “Terrifies me, but does not surprise me, because more and more people are just abdicating their financial responsibilities and turning them over to someone else that they perceive to be an authority in the matter.”

    Can you decipher a credit card contract? You can’t! Prof Warren has hundreds of very smart students and colleagues at Harvard who tried it as an exercise. None of them could deconstruct all the 31 pages (!!) of a “plain vanilla contract.

    By the way, what’s wrong with adopting basic standards for contract? Isn’t it how it is supposed to be? Why should they be ever more complex for a product which basic characteristics are the same as they were 30 years ago? To stimulate citizens’ sense of responsibility perhaps?

    While we’re at it, where did you get the idea the CFPA would “pre-approve specific types of transaction”? All it is designed to do is to make the information about said transaction UNDERSTANDABLE. Pray tell how this would be a bad thing?

    I can only conclude that, carried away by a pidgin-libertarian type of ideology, you fail to see what the true intended scope of the CFPA; leveling the playing field between consumers and financial institutions. What’s wrong with that?

  93. It is very difficult to fight ignorance when the very purpose of the credit card industry is to obfuscate, confuse and trick the consumer.

    I will remind people that the credit card industry went so far as to conduct psychological clinical trials (!!) in order to design the most repellent and confusing forms possible.

    There is a very good reason why they’ll fight the creation of the CFPA tooth and nails. If the hate it so much, it is because we, the consumers, would gain form it.

  94. Micahel LittleBig

    What difference does it make to the Office of Thrift Supervision if their federally chartered bank like the AmTrust Bank in Cleveland Ohio has a delinquency of 7%. The Office of Thrift Supervision does not enforce the rules as it is. This regulatory agency is a tool of the wealthy and the powerful, The Congress. Other wise something would have been done.
    April 24 ,2009 the Wall Street Journal in their article”, Regulators Fell One Bank, Spare a Rival” stated that Ohio Senator Voinovich and Ohio Representative LaTourette both Republicans told the OTS Hands off of AmTrust Bank, in other wards this banks that operates outside the rules has political protection from being shut down.

    The OTS did issue a Cease and Desist order against AmTrust Bank in November 2008 for Unsafe and Unsound Banking Practices; this was for poor financial ratios. On March 17 2009 Bill Dedman of MSNBC reported that AmTrust Bank had 30 % more troubled loans than capital and reserves. Last year the Plain Dealer reported AmTrust bank with a 7 % delinquency in loans. This by the way is the largest bank to have a ratio over a 100.

    AmTrust bank sued in January 30, 1985 (Cleveland Ohio Case # 85-86378) for the manipulation of mortgage interest calculation which they settled in September 2007 for a cash payment of 14 million dollars which involved some 27,000 borrowers. I cannot find where the OTS ever cited the AmTrust Bank for this Truth in Lending Violation and in March 2009 the OTS refused to answer if they ever cited this bank. The Government has publically stated that the OTS is lax in their enforcement of the rules.

    The OTS has no credibility, but with out a doubt has culpability. A better way to describe the Office of Thrift Supervision is the Congressional regulatory agency that has made misfeasance an art form.

    Michael LittleBig
    Cleveland Ohio

  95. smart enough to make my own decisions

    You do realize that is exactly the plan, and may play a large part in EW’s high level of interest in the CFPA…