So Peter Wallison of the AEI has an opinion piece, Elitist Protection Consumers Don’t Need, in the Washington Post, arguing against the Consumer Financial Protection Agency (h/t Nick Schulz). Mark Thoma and Richard Green give it a critical look; I’ll add my thoughts here.
I want to take Wallison’s argument apart piece by piece.
A Strong Tradition
Traditionally, consumer protection in the United States has focused on disclosure. It has always been assumed that with adequate disclosure all consumers — of whatever level of sophistication — could make rational decisions about the products and services they are offered. No more.
Traditionally how? Since 1983? All the stuff we associate with subprime loans and irresponsibly risky loans – prepayment penalties, interest-only loans, option-ARMs, adjustable rates – were illegal until Congress passed the “Alternative Mortgage Transaction Parity Act of 1982” (AMTPA). You also had an interest rate ceiling on mortgages until the “Depository Institutions Deregulation and Monetary Control Act of 1980” (DIDMCA).
This wave of deregulation was a series of experiments, and it in is the nature of experiments to sometimes fail. This one has failed. Note that the Consumer Financial Protection Agency won’t take us back to 1981; it will just set our default option to the choices in that year. If you asked me if we should revoke AMTPA, I’d say it’s not a terrible idea. However I see where the Obama administration wants to go with this, trying to save the baby in the bathwater. There are some very smart people, like Richard Serlin, who thinks we should set the clock to 1979 and cut DIDMCA – that bill just allows us to have a pointless bidding war for access to good school districts. I am not sure how I feel about that bill in terms of a tradeoff; it is important to acknowledge that Obama is trying to find a middle ground to preserve the so-called “innovations” of subprime loans, and groups like AEI should be applauding that, no?
Conservatives have always argued that liberals are elitists who do not respect ordinary Americans; this legislation seems to prove it. For example, the administration’s plan would allow the educated and sophisticated elites to have access to whatever financial services they want but limit the range of products available to ordinary Americans….
So who will be able to get those more complex products and services? Not ordinary Americans, whose lack of financial sophistication will make the risks of selling to them too great for most providers. The more complex products, the ones that are better tailored to the needs of the particular consumer, will be offered only to the more sophisticated and better educated — in other words, to the nation’s elites.
Wallison seems fixated on this issue of elites versus regular Americans. In his telling of this story, he fears an America where average people get vanilla prime loans, while transnational elites get to take out subprime loans featuring option-arms, balloon payments, prepayment penalties, interest rate spikes, etc. Is this how he has read the past decade of housing – that the poor and uninformed really wanted in on the subprime bandwagon, but petty elites didn’t want them to join their exclusive party?
Do you need me to gather data on this? Fine, just a bit. Here’s your national elite, hoarding the subprime bonaza for themselves and not sharing it with regular Americans:
Feeling Humiliated; Externalities
How would a provider be expected to determine whether a product that involves more risk or complexity than the plain-vanilla version is suitable for a consumer? The white paper offers this: “The CFPA…require providers to have applicants fill out financial experience questionnaires.”…
one can only imagine the humiliation of the consumer who must fill out a questionnaire to establish his capacity to purchase anything more than the plain-vanilla product….
In this way, and for the first time in our history, the government will force a major sector of the U.S. economy to deny products and services to a large proportion of the population — not because the products or services are inherently dangerous, like drugs or explosives…
I’m kind of new to the policy thing, being from finance, but is AEI the type of organization that emphasizes feelings over responsibility? (Do they also argue that difficult tests in schools should be thrown out because they humiliate some kids?) He’s completely wrong on that not dangerous part. A ballpark estimate of the losses to neighbors from the ongoing foreclosures is $200 billion dollars. Another AIG! Spread out among people who could afford their mortgages! Mortgages have externalities with them if they go bad; real value is lost in bankruptcy, and foreclosures directly effects the options that can be exercised by their neighbors over their lives and their property. Can they follow a job to a new city? Upgrade to a new home? They can do that a little bit less if there is a foreclosure sign down the block, and not at all if their neighborhood is littered with them. Options have value, and hurting options harms people’s lives. Homeownership is a responsibility.