James Surowiecki says U.S. voters should support a new Consumer Financial Protection Bureau (C.F.P.B.) because consumers make finance mistakes: Many Americans are ill informed about financial products. … You might think that businesses offering better products would have an incentive to make sure that potential customers were able to distinguish between ripoffs and good deals, but … there’s “a limit to how much explaining a creditor can do before losing the attention of its customers.” … Warren … talked to a number of banks about introducing a credit card with a higher up-front interest rate but lower penalty fees—a cost-effective arrangement for many people. But … there was no way to convince consumers that it was a good deal. In a world where marketing is all about the lowest teaser A.P.R., … you end up with a race to the bottom. …
"Although these appointments are certainly political in nature, there are significant cultural and reputational pressures on the appointment process to ensure the hallmarks of legitimacy - specifically, politicians must be sensitive to institutional pedigree, demonstrated competency, education level, bipartisanship, etc. People with graduate level training in public policy, economics, or substantial experience in banking would be good candidates.""Hallmarks of legitimacy" are not enough. Life is not that simple. Suppose there is disagreement on regulatory theory, policy, scope, political viability, historical records and interpretations of success/failure, economic theory, conflicts of interest, privacy and security issues, monitoring, priorities, resource allocation, independance from industry, etc? Will everything still be hunky dory? "Cultural and reputational pressures" would have to include all pressures, good and bad, such as "stock libertarian ideology" (ex: Ron Paul and the Fed). These pressures also exist for private firms, and perhaps more so if they are not simply assumed to be as competent and trustworthy as regulators apparently are. Indeed, why not just say the social pressures are redundant, if all these highly educated regulators are so competent and knowledgeable? Can't we just trust them to do the right thing, sans a profit motive?
Last problem here is that regulators are not acting in a static, textbook modelled environment. They are competing with the movers and shakers of the financial industry. The regulatory framework exists within a game - it does not simply define the world from the outside. DrModern's views sound a lot like Plato's 'Republic'.
That is a question that Robin can't answer, because when you are trying to game the system, the first rule is never talk about trying to game the system.
Amen. As to "purveying stock libertarian ideology", Hanson is funded in part by the Koch brothers, the same people who fund the rest of the libertarian propaganda machine (Reason, Cato, George Mason, and a very long list of others). I've periodically asked on this blog for an explanation of whether this funding source induces bias, and if not, why not. It is a key element of Hanson's ideas that money and cognition are or should be deeply linked (eg, in prediction markets); so I'd like to know how it is possible to take money from a major political player without being influenced by it.
What you are missing is an understanding of the administrative structure of such an agency. While certainly real, the problem you cite - wherein uninformed voters select suboptimal politicians - is simply irrelevant, since voter choices do not directly influence the content of regulations. Rather, voters elect representatives to Congress, which then delegates its law-making authority to an administrative agency, whose executes may only be selected in accordance with constitutionally specified norms. Although these appointments are certainly political in nature, there are significant cultural and reputational pressures on the appointment process to ensure the hallmarks of legitimacy - specifically, politicians must be sensitive to institutional pedigree, demonstrated competency, education level, bipartisanship, etc. People with graduate level training in public policy, economics, or substantial experience in banking would be good candidates. These pressures help ensure that the people who are selected to write regulations both have a significant degree of understanding of the market practices they are regulating, as well as a significant degree of knowledge about successful regulatory practices elsewhere in government. This historical knowledge is especially salient where, as here, there are obvious analogues to existing regulatory agencies - namely the SEC. Moreover, it's not especially difficult to imagine the design of such mandated information-sharing, though there are always unanticipated complexities as markets react to regulation and loopholes are exposed.
In other words, you're comparing the wrong processes. It's incorrect in attacking a proposed CFPB to draw an analogy between consumer choices about banking products (especially products that were specifically designed to be deceptive) and "consumer" choices about politicians generically. There are mediating and supervening processes that control the appointment of people to administrative agencies that ensure that those writing regulations are competent to do their jobs. The correct comparison is between consumer choice over banking products and the congressional appointment process, and surely the differences between these are obvious. If what you're really arguing is that you do not trust the members of Congress to arrive at unbiased decisions regarding the optimal appointees, I'd say keep dreaming. It's still relatively clear that markets beset by information asymmetry can benefit from the introduction of regulations that require information-sharing, and that the creation of an administrative body with authority over those regulations is a relatively effective means of promoting that information-sharing. If what you're really arguing is that you do not understand why it is better to entrust these processes to government rather than to market actors, then I'd say that you're just purveying stock libertarian ideology, which is rather ironic for a site called "overcoming bias."
A regulator who is an industry captive is far worse than no regulator at all. "Preventing the offering of good products" is a substantial part of what all regulators do and captured regulators do this more than most.
Consider that taxi regulations invariably are designed to limit the number of cabs on the street. Suppose the regulators are unusually well-meaning and clever and manage to successfully eliminate only the *bottom* 50% of cab-drivers. Now all the cabs that remain are better cars, better drivers, less dirty, less polluting than before, so the regulators have increased the average *quality* of a cab ride...but there are half as many cabs so it's harder to find one! By "improving" one set of metrics to the benefit of existing suppliers and those with political pull, they've made every customer worse off.
The FDA does the same for drugs - drugs and devices may be better tested but are fewer and more expensive and slower to get approved, which is worse overall for the consumer. These new banking regulations will do much the same - eliminating even "the worst" financial products makes everyone worse off by reducing innovation and competition.
Captured regulators don't fail to regulate an industry, they regulate it *more*. They do so to the benefit of existing suppliers and the detriment of upstart challengers who aren't grandfathered in and can't jump through the new regulatory hoops. This harms us all.
I'd like to hear Robin's response to the idea that the permanent civil service is nearly immune to democratic pressure, and it is they who produce regulation. What's his implicit public choice theory?
And if you really love your cat you'll train it not to drink antifreeze by making it suffer the consequences (as opposed to not having open bottles of antifreeze lying around).
Totally agree. Voters are irrelevant. It is the incentives of regulators and those that appoint them that are critical. Consumers don't have to trust regulators and would do better not to, but we are not talking about trusting them for there is no trust involved when no choice is involved. Unless one conjures up a regulator so perverse their objective is to prevent the offering of good products, a regulator would at worst be an industry captive which is to say the same as if they didn't exist.
Let's assume no one really knows what they are doing, so carefully crafted policy runs the gamut from good to bad.
When enacted, it is plausible that banks will first comply and then try to evade regulations. Compliance is expensive, but inventing a workaround is expensive and hard.
Under this model, regulatory workarounds that are worth more money to the bank, and thus to the consumer who chooses their services in the market, will eventually be used to evade regulations. Regulations that "work" will benefit everyone. You start with a spectrum of regulations from good to barely good to neutral to barely bad to bad. Bad regulations are evaded. Barely bad ones are not, but represent the cost of doing business for ignorant voters/consumers who would rather spend more time doing fun stuff than paying attention to bank loans or regulatory policy. The end product is mostly positive and the negative can be considered the cost of not having to engineer policy as well.
Also, from this model, it seems any process of deregulation would be bad. Like the regulators proposing a span of regulations from good to bad, deregulators would try to remove regulations that run the gamut from good to bad. Since bad regulations are evaded, their removal does nothing. However, good regulations are likely to be removed.
Again, since no one really knows what they are doing, business will go right ahead and try new things in the areas where the good regulations were removed.
And since no one really knows what they are doing, we never actually know which regulation in place is good or which deregulatory action led to a financial crisis.
If all that was needed was a third party advisor with ambiguous or "non-profit" incentives, then it would be enough to have independent orgs who offer advice to people about banking products. You need regulators to force people to follow such advice.
Should the violins on the Titanic play a waltz or a classical piece?
Meanwhile the entire dollar / fiat / debt Ponzi is listing heavily to starboard and some very disturbing groaning and popping noises are coming from the bulkheads. Get in your gold and silver-colored lifeboats while you still can.
Consider that government is highly involved in education. There's a lot of waste in education but it's not considered morally bad because it is all legal, if not encouraged. It's easy to pursue a perverse higher agenda when you don't require the tactics to be cash-flow positive because it's all justified via nonquantifiable spill-over effects and moral righteousness.
I predict all government will do more like what it did with mortgages: encourage particular types of transactions that will have with lots of short-term profitability. Then, when it blows up, they will blame the banks.
If they really wanted to help poor people financially they would raise their costs for certain behaviors: get rid of state lotteries, have a minimum bank balance to get a credit card, etc. Instead, they want to encourage the activities that most hurt them. Subsidizing foolish financial behavior, from overdrafts, to excessive debt, is like giving poor people drugs to make them happy.
Meh. This looks more like an information problem, coupled with cognitive biases that work against consumers.
Let's put it this way.
(1) Banks have highly trained analysts and access to lots and lots of data and experience about consumer behavior. They can create complex products difficult for consumers to understand.
(2) Individual consumers (rationally and not) can't expend the effort to understand complex financial products because they have better things to do (like work).
(3) Consumers also have cognitive biases and limitations that hamper their ability to evaluate the financial products of banks. Nor do they have ready access to data about how such products actually perform.
So, there is a big power, information, and cognitive imbalance here that makes it hard for consumers to be "rational maximizers".
Perhaps one regulatory solution would be to require some sort of 3rd party simulation of actual financial returns for any financial product. Perhaps then consumers have better than a snow-ball's chance in Hell to understand and evaluate financial products? Or perhaps we should just grant power of attorney to some company with equal access to highly rational expertise and great piles of data for analytics. That company could be contracted to be our agents on hard issues (life insurance, medical insurance, degree programs, banking services, etc.) since we really can't trust ourselves to make rational decisions. Sorta "opt-in" totalitarianism, or "totalitarianism as a service".
Who Watches Watchers?
"Although these appointments are certainly political in nature, there are significant cultural and reputational pressures on the appointment process to ensure the hallmarks of legitimacy - specifically, politicians must be sensitive to institutional pedigree, demonstrated competency, education level, bipartisanship, etc. People with graduate level training in public policy, economics, or substantial experience in banking would be good candidates.""Hallmarks of legitimacy" are not enough. Life is not that simple. Suppose there is disagreement on regulatory theory, policy, scope, political viability, historical records and interpretations of success/failure, economic theory, conflicts of interest, privacy and security issues, monitoring, priorities, resource allocation, independance from industry, etc? Will everything still be hunky dory? "Cultural and reputational pressures" would have to include all pressures, good and bad, such as "stock libertarian ideology" (ex: Ron Paul and the Fed). These pressures also exist for private firms, and perhaps more so if they are not simply assumed to be as competent and trustworthy as regulators apparently are. Indeed, why not just say the social pressures are redundant, if all these highly educated regulators are so competent and knowledgeable? Can't we just trust them to do the right thing, sans a profit motive?
Last problem here is that regulators are not acting in a static, textbook modelled environment. They are competing with the movers and shakers of the financial industry. The regulatory framework exists within a game - it does not simply define the world from the outside. DrModern's views sound a lot like Plato's 'Republic'.
That is a question that Robin can't answer, because when you are trying to game the system, the first rule is never talk about trying to game the system.
That was a great link about Jane Jacob.
Amen. As to "purveying stock libertarian ideology", Hanson is funded in part by the Koch brothers, the same people who fund the rest of the libertarian propaganda machine (Reason, Cato, George Mason, and a very long list of others). I've periodically asked on this blog for an explanation of whether this funding source induces bias, and if not, why not. It is a key element of Hanson's ideas that money and cognition are or should be deeply linked (eg, in prediction markets); so I'd like to know how it is possible to take money from a major political player without being influenced by it.
What you are missing is an understanding of the administrative structure of such an agency. While certainly real, the problem you cite - wherein uninformed voters select suboptimal politicians - is simply irrelevant, since voter choices do not directly influence the content of regulations. Rather, voters elect representatives to Congress, which then delegates its law-making authority to an administrative agency, whose executes may only be selected in accordance with constitutionally specified norms. Although these appointments are certainly political in nature, there are significant cultural and reputational pressures on the appointment process to ensure the hallmarks of legitimacy - specifically, politicians must be sensitive to institutional pedigree, demonstrated competency, education level, bipartisanship, etc. People with graduate level training in public policy, economics, or substantial experience in banking would be good candidates. These pressures help ensure that the people who are selected to write regulations both have a significant degree of understanding of the market practices they are regulating, as well as a significant degree of knowledge about successful regulatory practices elsewhere in government. This historical knowledge is especially salient where, as here, there are obvious analogues to existing regulatory agencies - namely the SEC. Moreover, it's not especially difficult to imagine the design of such mandated information-sharing, though there are always unanticipated complexities as markets react to regulation and loopholes are exposed.
In other words, you're comparing the wrong processes. It's incorrect in attacking a proposed CFPB to draw an analogy between consumer choices about banking products (especially products that were specifically designed to be deceptive) and "consumer" choices about politicians generically. There are mediating and supervening processes that control the appointment of people to administrative agencies that ensure that those writing regulations are competent to do their jobs. The correct comparison is between consumer choice over banking products and the congressional appointment process, and surely the differences between these are obvious. If what you're really arguing is that you do not trust the members of Congress to arrive at unbiased decisions regarding the optimal appointees, I'd say keep dreaming. It's still relatively clear that markets beset by information asymmetry can benefit from the introduction of regulations that require information-sharing, and that the creation of an administrative body with authority over those regulations is a relatively effective means of promoting that information-sharing. If what you're really arguing is that you do not understand why it is better to entrust these processes to government rather than to market actors, then I'd say that you're just purveying stock libertarian ideology, which is rather ironic for a site called "overcoming bias."
A regulator who is an industry captive is far worse than no regulator at all. "Preventing the offering of good products" is a substantial part of what all regulators do and captured regulators do this more than most.
Consider that taxi regulations invariably are designed to limit the number of cabs on the street. Suppose the regulators are unusually well-meaning and clever and manage to successfully eliminate only the *bottom* 50% of cab-drivers. Now all the cabs that remain are better cars, better drivers, less dirty, less polluting than before, so the regulators have increased the average *quality* of a cab ride...but there are half as many cabs so it's harder to find one! By "improving" one set of metrics to the benefit of existing suppliers and those with political pull, they've made every customer worse off.
The FDA does the same for drugs - drugs and devices may be better tested but are fewer and more expensive and slower to get approved, which is worse overall for the consumer. These new banking regulations will do much the same - eliminating even "the worst" financial products makes everyone worse off by reducing innovation and competition.
Captured regulators don't fail to regulate an industry, they regulate it *more*. They do so to the benefit of existing suppliers and the detriment of upstart challengers who aren't grandfathered in and can't jump through the new regulatory hoops. This harms us all.
I'd like to hear Robin's response to the idea that the permanent civil service is nearly immune to democratic pressure, and it is they who produce regulation. What's his implicit public choice theory?
And if you really love your cat you'll train it not to drink antifreeze by making it suffer the consequences (as opposed to not having open bottles of antifreeze lying around).
As long as the tax slaves are made to pay for the mistakes and banks are allowed to keep the profits, I have not problem with it.
Public risk. Private profit. It's the Amerikan way!
Totally agree. Voters are irrelevant. It is the incentives of regulators and those that appoint them that are critical. Consumers don't have to trust regulators and would do better not to, but we are not talking about trusting them for there is no trust involved when no choice is involved. Unless one conjures up a regulator so perverse their objective is to prevent the offering of good products, a regulator would at worst be an industry captive which is to say the same as if they didn't exist.
Let's assume no one really knows what they are doing, so carefully crafted policy runs the gamut from good to bad.
When enacted, it is plausible that banks will first comply and then try to evade regulations. Compliance is expensive, but inventing a workaround is expensive and hard.
Under this model, regulatory workarounds that are worth more money to the bank, and thus to the consumer who chooses their services in the market, will eventually be used to evade regulations. Regulations that "work" will benefit everyone. You start with a spectrum of regulations from good to barely good to neutral to barely bad to bad. Bad regulations are evaded. Barely bad ones are not, but represent the cost of doing business for ignorant voters/consumers who would rather spend more time doing fun stuff than paying attention to bank loans or regulatory policy. The end product is mostly positive and the negative can be considered the cost of not having to engineer policy as well.
Also, from this model, it seems any process of deregulation would be bad. Like the regulators proposing a span of regulations from good to bad, deregulators would try to remove regulations that run the gamut from good to bad. Since bad regulations are evaded, their removal does nothing. However, good regulations are likely to be removed.
Again, since no one really knows what they are doing, business will go right ahead and try new things in the areas where the good regulations were removed.
And since no one really knows what they are doing, we never actually know which regulation in place is good or which deregulatory action led to a financial crisis.
If all that was needed was a third party advisor with ambiguous or "non-profit" incentives, then it would be enough to have independent orgs who offer advice to people about banking products. You need regulators to force people to follow such advice.
Surowiecki even makes this point in The Wisdom of Crowds when he discusses people's ability to follow the correct expert.
Should the violins on the Titanic play a waltz or a classical piece?
Meanwhile the entire dollar / fiat / debt Ponzi is listing heavily to starboard and some very disturbing groaning and popping noises are coming from the bulkheads. Get in your gold and silver-colored lifeboats while you still can.
Consider that government is highly involved in education. There's a lot of waste in education but it's not considered morally bad because it is all legal, if not encouraged. It's easy to pursue a perverse higher agenda when you don't require the tactics to be cash-flow positive because it's all justified via nonquantifiable spill-over effects and moral righteousness.
I predict all government will do more like what it did with mortgages: encourage particular types of transactions that will have with lots of short-term profitability. Then, when it blows up, they will blame the banks.
If they really wanted to help poor people financially they would raise their costs for certain behaviors: get rid of state lotteries, have a minimum bank balance to get a credit card, etc. Instead, they want to encourage the activities that most hurt them. Subsidizing foolish financial behavior, from overdrafts, to excessive debt, is like giving poor people drugs to make them happy.
Meh. This looks more like an information problem, coupled with cognitive biases that work against consumers.
Let's put it this way.
(1) Banks have highly trained analysts and access to lots and lots of data and experience about consumer behavior. They can create complex products difficult for consumers to understand.
(2) Individual consumers (rationally and not) can't expend the effort to understand complex financial products because they have better things to do (like work).
(3) Consumers also have cognitive biases and limitations that hamper their ability to evaluate the financial products of banks. Nor do they have ready access to data about how such products actually perform.
So, there is a big power, information, and cognitive imbalance here that makes it hard for consumers to be "rational maximizers".
Perhaps one regulatory solution would be to require some sort of 3rd party simulation of actual financial returns for any financial product. Perhaps then consumers have better than a snow-ball's chance in Hell to understand and evaluate financial products? Or perhaps we should just grant power of attorney to some company with equal access to highly rational expertise and great piles of data for analytics. That company could be contracted to be our agents on hard issues (life insurance, medical insurance, degree programs, banking services, etc.) since we really can't trust ourselves to make rational decisions. Sorta "opt-in" totalitarianism, or "totalitarianism as a service".
Just thinking out loud....
Bingo.