Good-Bye, Vanilla Option

I realized I didn’t say anything about the death of the vanilla option from the Consumer Financial Protection Agency proposal. I was going to right something targeted and biting, but it ended up as a much broader column for the Washington Post about the Obama Administration’s commitment to regulatory reform.

Mike Konczal, fortunately, has two good posts on the topic: one a eulogy for plain vanilla, one on the underlying problems that plain vanilla would have helped solve. He also points out at least three ways the federal government can achieve some of the same goals through other means:

  • Banning prepayment penalties on mortgages
  • (Citing Alyssa Katz): using the government’s historically large and now even bigger influence in the secondary market to encourage plain vanilla mortgages
  • (Citing Steve Waldman): a government charge card (think “public option”)

All of those posts are worth reading. If we’re not going to have plain vanilla, we need other new ideas about how to channel innovation into things that provide consumer benefit and put a floor under the quality offered by the private sector. More disclosure won’t work (that already failed).

Update: The Raven compares the Obama administration to the Johnson administration, each with its “devil’s bargain.”

By James Kwak

16 thoughts on “Good-Bye, Vanilla Option”

  2. This Bob Dylan song lovingly dedicated to PLAIN VANILLA.
    There’s a more personal story for me that goes together with this song. But today it belongs to my short-term love PLAIN VANILLA.
    “Til I Fell in Love With You”

  3. Wasn’t encouraging plain vanilla mortgages one of the raisons d’ete of the GSE? The very DEFINITION of vanilla is the 30yr Conforming FRM, otherwise known as what they would buy.

  4. Thanks for this ‘cute little article’ – I started reading it a couple of hours ago – All the recommended posts were great and lead to other interesting posts! This is maybe why you have so few comments so far…it’s really hard to ‘finish up’!

    This article adds nicely to earlier posts you’ve done on ‘innovation’. It also adds to the evidence of a real need for economic theory, when it evolves (maybe in our lives?), to include a useful definition of innovation that holds potential to be linked to humanity and life giving nature. ie. Is it really ‘innovation’ if it has potential to hurt people?

  5. we need other new ideas about how to channel innovation into things that provide consumer benefit and put a floor under the quality offered by the private sector.

    How about government mortgages based on a fixed formula (that formula is in a computer, not in a bureaucracy). The fixed formula based on the amount of income taxes already paid (which the Feds know) and the tax-assessed value of the property (which the local gvt knows).

  6. Right now the gvt collects social security tax and pretends to save it in a growing fund for your future use. Why not the gvt actually invests your SS money in mortgages?

  7. It’s time to throw in the towel and understand that the next bubble is well on its way. There is simply no chance, with or without Barney Frank and Elizabeth Warren, that the financial industry (right down to its most remote perifery) will allow regulation to stifle its attempts to make excessive profits at the expense of the citizens of this country. It just can’t happen, at least not until the media decides to forego some advertising revenue to do a real expose’ of what is really happening to us.

    It is right to talk about Louis, because we are back in the age when the Max Boguses and John Boners on Capitol Hill are going to rally to support those who they derive so much benefit from. Talk about a powerful plutocracy (this is rapidly becoming the dictionary definition). It’s gotten to the point where such semi-subtle corruption is so complete that it resembles the Soviet Union in its prime.

    I will say it again, and soon turn blue doing so, that the only solution is revolution, and you can tell we’re in trouble because the Republicans are running the Tea Parties at present (go figure!!!).

  9. Two ideas:

    (1) Apparently in Germany they have a system where when you sign on to a financial contract (credit card/mortgage…) there is a bureaucrat (not a bank employee) who talks you through the contract to ensure that you understand the provisions. I don’t know much about it so maybe someone can add to my brief description?

    (2) How about contracts that are derived from a set of vanilla contracts, then adjustments can be made to the contracts by a strikethrough of the vanilla term followed by the new term? For example, “mortgage term is 30 years 15 years.

    These options may help to retain some of the benefits of vanilla in terms of people knowing what they are buying, while still allowing for innovation in contracts.

  10. How can anyone still claim to think:

    1. That there still even can be such a thing as financial “innovation”.

    2. Even if there could be, that it would be worth leaving any room for it when that space is overwhelmingly likely to be filled instead with the same old predatory, criminal rent-seeking.

    I take it for granted that either of these is just a stalking horse for enabling further bank crimes and bank wealth and power concentration.

    I don’t know how much of the continued-innovation-seeking mindset is acculturation (brainwashing and conformism) and how much is rentier tactics.

    And if someone really believed there could still be innovation and thought it still worth seeking after all we’ve been through, at such likely social cost and parochial benefit, what kind of psychopath would he have to be?

    “Let the world perish as long as I have my ideology.”

  11. I really enjoyed the post over on Raven’s blog. I agree with 90% of his analysis. I was also surprised that James Kwak was so blunt about Geithner. I think James was dead on target, but just surprised James was that blunt about it.

    The 10% where I think Raven was wrong was Lyndon Johnson. I am a Democrat. Some would even say I am a “lefty”. But I don’t think you can’t paint Johnson so sweetly. It was no “deal” he made with “warmongers”. Kennedy had gotten him into that war, and my guess is he was going to show everyone that he could finish a Kennedy job better than a Kennedy could. And then he realized he bit off more than he could chew, and just couldn’t bring himself to lose a war. He knew he was digging himself in deeper and deeper, but his mentality just wouldn’t let him admit America (on his watch) for the FIRST time, had lost a war. He couldn’t imagine Americans would EVER lose a war. He was from Texas, with a very macho Texas mentality, and he knew Americans detest losing and cannot tolerate losers. I think even McNamara at the end had had enough, that’s why he resigned.

    I highly recommend the documentary film/interview of Robert McNamara called “The Fog of War”. That’s the best explanation of the Viet Nam War I ever saw.

  12. In the above post I meant to say I don’t think you (Raven) CAN paint Lyndon Johnson so sweetly. I think Johnson was a good man. Deep down inside Johnson was a very good man. You could tell the war was tearing him up inside. He was aging very fast because the burden of the deaths. But he just couldn’t make himself admit American defeat.

  14. Thank you for the kind words. James was after all blunt in private e-mail, though he was kind
    enough to grant permission for me to quote him.

    Two nits only:
    1. If saying Johnson made a devil’s bargain is painting him sweetly, I’m not sure what painting him bitterly would be! Viewing him through the prism of good-and-evil, I think any honest commentator would say he did both.
    2. Johnson sent the first troops to Vietnam, and the Tonkin Gulf resolution was passed on his watch. IIRC, both the Senate deal and Johnson’s doubts were well-documented, but I’d have to do some digging to get you cites on them. Once troops were sent, however, Johnson went into the war whole-hog.

    BTW, my not-completely-researched impression is that both JFK and LBJ were less hawkish than their advisors. If one may imagine the imperial presidency as having an imperial court, I would say that Johnson’s advisors stood in the role of courtiers. The advisors did not feel the weight of responsibility that both Presidents felt. They were, as it were, hiding behind the robes of the emperor.

    Which, returning the main subject of this blog, perhaps in part accounts for the failings of the President Obama’s economic team. Hmmm.

  15. I don’t think anyone owned Johnson. He was his own man–failings and all. While placating his long-time supporters was probably a factor in his decision making, I think his record speaks as I have written. Johnson was perfectly capable of jilting long-time supporters if he felt the need: he was willing to lose the Southern Democrats entirely.

  16. We got Karl Smith on the PLAIN VANILLA team. He became a starter on the PLAIN VANILLA team yesterday.
    http://modeledbehavior.com/2009/10/01/financial-innovation-as-a-tax/
    (Gets into Barry Switzer mode) No benchwarmers here boys!!! Now boys, we’re gonna fight!!! Then we’re gonna fight some more!!! And then when you want to go home and cry to Mommy, I’m gonna slap you upside the head and we’re gonna fight some more!!! The PLAIN VANILLA dream never dies!!! Winners never quit, and quitters never win!!!

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