What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers.
The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would allow consumers to 1) Understand the amount of money the financing would cost them; 2) Determine if they could afford this product; 3) Allow them to shop competitively for the best rates.
Good idea, right? Considering that we are a nation that made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, a little impulse control is probably a good idea. More accurate cost disclosures of credit will also help. We are, after all, a country of math-phobic shopaholic shit junkies. Anything that can help us figure out whether we can afford our bigger purchases — like cars and houses — should be a no-brainer.
Unfortunately, the banking lobby, in conjunction with the auto dealers lobby, had other ideas. A simple mandate to have all mortgages shown compared to a plain vanilla 30 year fixed was thwarted. It was to be similar to the FDA nutrition disclosures on the side of your kid’s cereal box. Who, could possibly object to that?
That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become. They can’t even get something this modest — and needed — passed.
Think back to the boom times of yesteryear. How many Americans actually understand the mortgages they were applying for? Did they calculate the costs, obligations and risks of their Refis, HELOCs, and piggyback loans? The answer for the vast majority of US citizens is an emphatic NO. If anyone needs better disclosure of financial costs, it is the mathematical illiterates — innumerates — here in the USA.
Over the years, I have had countless conversations with home buyers about their mortgages. From 2003 to 2008, a typical a cocktail party or a BBQ invariably went something like this:
Home-Buyer: We got a great deal on our new mortgage. Me: Did you do a 30 year fixed or something more exotic? HB: 30 year fixed — at 4.5% ! BR: Sorry, but that’s not 30 year fixed — rates are 6.5% today. That’s probably a 2/28, with a reset in 200X. HB: No, we definitely asked for a 30 year fixed. BR: Well, that’s not what you got — its impossible to get that loan at that rate today. HB: We’re good negotiators. BR: Mortgage rates are set by the bond market. Banks charge a mark up ABOVE the rates that they can borrow money. They can’t get 30 year money at 4.5%, so you can’t get 4.5%. There is only so much negotiating you can do with the bond market. HB: Well, its definitely a 30 year fixed. BR: Please make the pain stop . . .
And so on.
Huge swaths of people, did not understand what they were buying, what it cost them, what their other options were, whether they could afford it or not.
I am not saying this to exonerate their ignorance — it is inexcusable in my opinion. Adults must take responsibility for their decision making, regardless of how foolish it may have been. That home buyers cannot figure out a basic financing document is beyond my comprehension. However, that is the way it is. We must acknowledge the simple reality, if we wish to avoid this problem in the future. That’s why we need to insure consumers understand what they are purchasing.
Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.
The Fed is the wrong agency for this.
It does not need to be a giant bureaucracy, just a relatively simple set of disclosure laws to make sure consumers understand, in plain English, what they are buying. And the teeth to enforce them.
Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.
If we are going to have an informed consumer class making intelligent financial decisions, a Consumer Protection Agency is a good place to start . . .
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via Tom Toles
[...] Barry: "We are, after all, a country of math-phobic shopaholic sh*t junkies." (TBP) [...]
An informed consumer is the last think they want. Where is Sy Syms when u need him.
Barry – Bravo. One minor quibble that turns into a major problem at the heart of it though. Arguing by analogy we don’t ask our heart surgeon to each us the ins and outs of his trade, rather we trust and depend on him to do what’s best and INFORM us to the best extent possible and reasonable so we can make a reasonably informed decision. We also get multiple opinions.
Asking the average consumer to understand financial documents that are hundreds of pages and deliberate obscure and complicated is like asking you to design your own heart operation. Nor can we point just at consumers. The entire financial crisis was created by executives who had, literally, no clue as to how the rocket science they were depending on to work. (NB: it would appear from your recent GS and MER posts that only one sr. exec. team did get it and they used that to play the entire rest of the world, literally. Who thought we’d see Orange Country redux thrice).
As Dr. Johnson puts it, “don’t ask a man to understand it when his livelihood depends on his not understanding”. The bigger implication, in other words, is that the financial companies don’t make money by creating value they make money by deceptive practices deliberately designed and built to mislead. That’s quite a business model and a horrendous indictment of the situational ethics of the Industry.
Can this go on? Not forever – one way or another there will be a Darwinian sortation process. We can either anticipate and correct it or deal with the consequences when it blows up. In the meantime we have a complete abdication of any sense of social responsibility by the Industry. In the long run they will destroy themselves because society cannot afford to have an Industry who’s central value proposition is based on harming people.
The Corporation vs Society: Performance, Social Responsibility and the Win-Win Banks As Businesses: Performance, Reform and Blindsidedness
I like your analogy to the FDA nutrition labels, that does paint a decent picture. And I’m sure there’s a way to provide easy to read (easy to compare) table to disclose how loans compare that would make it easier for time-pressed, emotionally stressed people to comprehend what they are committing to.
While we like to make fun of people who signed up to dumb things on the bottom line, often these occur when people are not at their best – emotionally involved and probably pretty nervous about making such a large purchase. You’d think they’d be extra cautious and some are, but many probably have the wrong part of their brains taking over at that time.
Things really are kind of hopeless when Congres can’t push through something seemingly so innocuous. But that is where we are. The lobbyists do run the show and they know it.
BR finally noticed:
Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.
reply: —————- Let’s not forget the everyday 1% to 2% everyday investment advisory who think nothing of keeping people invested just to keep the commissions rolling in. “OK, if stocks look a little punk, lets put it all in bonds.”, without mentioning that interest rates are about as low as they will ever go and bond math says prices have nowhere to go but down.
Or “China’s on FIRE! Emerging markets is the place to be.” without mentioning the empty cities, the vacant districts of office buildings, the commodity hoarding, or the winding down of China’s version of ZIRP.
I especially love the ones who tell elderly (80+) people with strong lizard brain impulses who need their savings to finish out their lives they need to keep invested because “What else are you going to do with it? The economy is recovering. You can’t earn anything in the banks.” (PS I’m the backstop for this elderly individual, forcing me to be ultra conservative because I won’t ignore the possibility that the avaricious adviser or a different one who has entered the picture hasn’t already convinced my relative to secretly put a toe back in the water.)
Or my idiot in laws who worship their adviser, without considering that if he were so smart, then he would be rich. And, if he were rich from investing, why is he bothering with them. If they weren’t relatives,I wouldn’t be bothering with them. Especially if I was rich.
BR said: “Considering that we are a nation that made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, a little impulse control is probably a good idea.”
Response: Exactly! But Considering, as a nation, how impulsive we are this is unlikely on a large scale.
Br Said: ” That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become.”
Reply (getting on soapbox): There is a major issue here that extends to all Federal (and probably most State) regulators. As long as their existence depends upon the legislative and executive branches of government, regulation and enforcement will always be subject to the whims of the political process. The entire political process at both the executive and legislative levels is corrupted by a sizable dependence upon and indebtedness to private enterprises whose interests are often in conflict with those of the people. That is where Markopolos, in his blasting of the SEC on the investigation of Madoff or the Fed on their treatment of banks, almost gets it right. Yes the SEC badly and repeatedly fumbled the ball on Madoff (and many others) and apparently tried to throw the game. But I have little doubt that any investigative efforts they might have considered were subject to some fairly profound political considerations. Typically any consideration of potential political consequences will win over duty or mission until the issue at hand promises to be embarrassing to the regulators. Until we find a way within our democracy to resolve the multiple conflicts of interest between business and government that extends to regulatory authority and enforcement another regulatory agency will just be more clutter on the playing field. A good start would be serious consequences, including terminations as well as criminal and civil penalties, for those within government who are charged with regulatory oversight and fail in their duties, and in doing so undermine the regulatory process.
I’ll now step down from my soapbox.
OT:metro NYC spared worst of recession (all that money poured into Wall Street! The bankers are spending their bonuses, 2009 was a great year (for them anyway!)
http://www.nytimes.com/2010/03/03/nyregion/03recession.html?th&emc=th
Nice idea, but I fear it would be rendered less effective in the same manner the SEC was (exhibit A: Bernie Madoff.)
BR,
just listened to podcast, as usualy, enjoyable discussion
consumper protection, roflmao, nutrition analogy is correct, the only that will correct is people borrowing less and less and less as time goes on, f’ em
An informed consumer is the last think they want. Where is Sy Syms when u need him.
–moss, above
that’s exactly it. “An Educated Consumer is Our Best Customer.”–Sy Syms ~~
past that, if these “math-phobic shopaholic shit junkies.”(–BR, above) can’t be bothered to do as much ‘Homework–’ for a transaction that can, literally, change their Lives–as they do for planning for lil’ Jonny’s Summer Camp, or their, next, Vacation, then “consumper protection, roflmao, nutrition analogy is correct, the only that will correct is people borrowing less and less and less as time goes on, f' em”–torrie-amos, above..
HB: Look, here’s are loan docs. BR: See, your loan resets next year. HB: That can’t be what it says. BR: Right there, you loan resets to a variable rate based. HB: Nope, my mortgage brokers is my best friend’s doctor’s dogs former owner… BR: Look. Look at the document. HB: …and this is my new, improved Sham-Ease BR: The one that slices and dices.. and can catch fish? HB: Yup. BR: Maybe Bill Gross had something about cocktail parties the other day…
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+March+2010+Bill+Gross+Dont+Care.htm
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