On Elizabeth Warren, Financial Literacy and Complexity

The recommendations for Warren keep coming in: The New York Times make the best case on her credentials, but there are other cases to be made. Matt Yglesias writes that it would rally the base. Noam Scheiber does the math and finds Warren can likely be confirmed.

Also 141 academics signed a petition supporting Warren. Notably the Roosevelt Institute’s Make Markets Be Markets conference contributors Michael Greenberger and Richard Carnell signed it. Warren presented the Consumer FInancial Protection Bereau at our conference earlier this year in the video above, and watching it it is difficult to think of a more successful champion for the project.

Some people like Karl Smith aren’t convinced: “Is there anyone who disputes that Elizabeth Warren has signaled that she will be a crusader on behalf of consumers; that she views consumers as having gotten a raw deal from the financial system and that she intends to do what she can to change that?…My ideal vision of the government is as an institution that is a fair and neutral arbiter of disputes. One that ensures that fraud, deception, bullying and coercion don’t go on.” His commenters caught that he’s contradicting himself there, and that fighting fraud, deception, bullying and coercion necessitate a role that speaks on behalf of consumers in the same way a lawyer fights for a client.

But let’s unpack Warren’s writings as I read them. Others may have a different interpretation. I think there are two main threads in what I’ve read of Warren’s popular work that are relevant, and that is her approach to consumer financial literacy and her arguments about complexity.

Consumer Financial Literacy as a buffer against Shocks

If you look at the final financial reform bill you get this in there:

(d) OFFICE OF FINANCIAL EDUCATION.— (1) ESTABLISHMENT.—The Director shall establish an Office of Financial Education, which shall be responsible for developing and implementing initiatives intended to educate and empower consumers to make better informed financial decisions.

There’s growing scholarly evidence that a lack of financial literacy was a contributor to the financial crisis. My suspicion we’ll find is that a lack of financial literacy made people vulnerable to fraud as people continue to investigate.

So it’s worth noting that Dr. Phil has endorsed Warren for her efforts, both on her show and in general, at increasing financial literacy. I know Karl Smith really wants to find a proto-marxist seething with the desire to destroy Wall Street buried here somewhere, but practically Warren does stuff like this: Conducting a Financial Fire Drill. “1. Can your family survive without one income?…2. Can you downshift your fixed expenses?…3. What is your emergency back-up plan?”

And as for blaming Wall Street for everything, that’s not what she writes to consumers. If you read her book All Your Worth she writes about mental traps that keep people in debt like this:

Finger-Pointing….The trap is in the hidden message: You are telling yourself that you are off the hook. The financial problems you face are someone else’s doing, and therefore it’s all out of your hands. You are telling yourself there’s nothing you can do. And if there is nothing you can do, then you have a free pass to sit on your duff….The truth is that there will always be a reason why you can’t balance your money….Move past the blame because it isn’t helpful. In fact, it is worse than not helpful; it is downright destructive….Because there is always something you can do. (p. 59-61)

I like the idea of economists, Wall Street, libertarians and bank-friendly democrats terrified of the idea of a person who uses the word “duff”, but it’s important to think of how much this doesn’t sync with where a lot of thinking is. This is an idea that debt could be a trap for consumers, that business models have evolved that make their biggest profits not by getting repaid but by keeping people underwater for as long as possible and that customers need to be wary. This goes against both the economic notion of a consumer as a fully-informed consumption smoothing robot and the idea that the financialization of our lives doesn’t come with a dark side.

And I’ll over-read the other part, the idea that the middle-class is facing a new type of economic vulnerability, one centered around the rising costs of the bundle of middle-class stability goods like transportation, child rearing and health care, and all the cheap stuff you can get at the mall doesn’t substitute for that, calls for a re-commitment to stability and economic security for families that, frankly, centrist aren’t willing to fight for. I think this is what is scary to elites, that the system we’ve built isn’t working for a lot of Americans, though it’s common sense for most of us out there. Warren advises consumers to be extra conscious of this as they set up their budgets, spending and households, urging people to take responsibility and think like a risk manager.


The other theme is complexity. In the video above Warren talks about how evolving complexity of credit cards contracts. I’m not sure if people like Smith are concerned about this. If the idea that the financial sector is putting on complexity without adding real value comes across as dangerously radical, then there are a lot of respectable dangerous radicals out there.

Rick Bookstaber, Senior Policy Adviser at the SEC, who has also worked at Bridgewater Associates, ran the Quantitative Equity Fund at FrontPoint Partners and was in charge of risk management at Moore Capital Management, thinks that a lot of the complexity in the derivatives market isn’t adding much value and writes about a flight to simplicity in derivatives.

Kevin Warsh, a member of the Board of Governors of the Federal Reserve System to the New York Association for Business Economics, says that “Asset quality and funding sources for financial firms must be more understandable and readily comparable among peers. Stakeholders can then make better informed judgments of potential risks and rewards” which is the same exact thing Warren says about consumer financial products like mortgages and credit cards.

American Enterprise Institute Fellow Alex Pollack created a one-page mortgage. (Warren’s talk used a two-page mortgage, so Pollack must be twice the radical Warren is.)

More disclosure doesn’t always help. This area is where the CFPB could, in theory, make the most difference. Warren likes to quote an AARP poll that asked if people want a two page credit card agreement, no tricks, no traps. 96 percent of Americans said, “That’s what I want.” 91 percent: “That’s what I strongly want.”

(If you are the type of person hyperventilating at the idea that a perfect market should have provided this by now, I’d recommend checking out Shrouded Attributes and Information Suppression in Competitive Markets by Gabaix and Laibson.)


I’m not much of a political analyst, but I’d note I think Republicans would have a hard time going hard against her. I’m not sure if the Republicans could opposed her as a block. Shahien Nasiripour reports about the waffling inside the Republican camp already.

A nomination battle where the GOP is blasting Elizabeth Warren is going to hurt them with women voters, voters they are looking to test out strategies to reach. For a GOP looking to put on women voters who like Sarah Palin the idea of the GOP yelling “who cares about a fee that is only $30?” or that “$1,000 in medical costs? That’s chump change!” at Warren would probably not work that well with women voters who fight to make sure the budget lasts the whole month.

And remember the Credit Card Bill of early last year passed the Senate 95-to-5. This is May, 2009, so we are already into GOP Waterloo territory on the Obama domestic agenda. That’s a lot of votes for the Senate; I think Republicans can’t quite defend this part of the financial sector in the same way that they work to get expanded derivatives loopholes.

And the GOP managed to make the financial bill much weaker and then voted against it anyway. And it’s not going to cost them anything that they did this. So turning up the heat with this nomination battle has to look good for voters.

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5 Responses to On Elizabeth Warren, Financial Literacy and Complexity

  1. SaraBelle says:

    Excellent arguments for Elizabeth Warren’s appointment being confirmed. She is well known to millions of people due to many appearnces on Dr. Phil’s show educating people about fiscal responsibility.

  2. Pingback: Elizabeth Warren and The Complexity Machine: Its Just That Simple «  Modeled Behavior

  3. Ted K says:

    I didn’t know she had ever appeared on “Dr. Phil”. Actually that may be the first thing I have ever heard about Miss Warren that would give me a negative impression of her. She is such a terrific person, considerate and empathetic to the needs of the working class and caring about the future of this nation. I mean I could go on and on about what a great person she is until everyone feels nauseated like I am reading a Shakespeare sonnet. I will just feel so dejected and a loss of hope for America if Miss Warren doesn’t get this job.

    Here is Barney Frank on The Colbert Report showing much more political courage and hutzpah than his colleague Chris Dodd in the Senate. And I really like how Barney Frank is willing to have a little fun with his own sexuality here and get some laughs and cheers. Really great stuff. GO BARNEY FRANK AND GO ELIZABETH WARREN!!! GIVE US NEW FAITH IN THIS COUNTRY!!!!!!

  4. engineer27 says:

    On complexity — I see similar things happening to airline fares. The true cost of flying on an airplane is going up, but you can’t see it because it’s hidden in all the “tricks and traps” fees. (“I’m sorry, your one checked bag is too heavy, so you’ll have to unpack some stuff and check a second bag — that’ll be another $40!”)

    And it is nearly impossible in a reasonable amount of time (like, before you have to be in Minneapolis) to actually do all the comparison and figure out which flight will actually cost less. So rather than being efficient rational choice actors, consumers are stuck with making decisions based on other factors. Thus, incentives for efficiently providing better service at lower cost are quietly removed from the system, and your “free market” takes off into the wild blue yonder and is lost — along with your luggage!

  5. Magpie says:


    Although I share your support of the Warren candidacy to head the Bureau of Consumer Financial Protection, there is a basic problem I find in your interpretation of Smith’s post (and I take his post more as broadly indicative of the right-wing, anti-Warren commentariat, than for its own).

    The problem is that you seem to assume these people are genuinely concerned (however unnecessarily) that Warren will unjustly side with consumers, to the banks’ loss. In other words, you may believe that Smith was expressing a real concern when he said:

    “What that agency should not be doing is taking explicit sides and aiming for explicit outcomes. It should not take the position that big banks are the villains and that consumers are the victims. It should enforce rules that ensure all players treat each other fairly.”

    As one of the comments to Smith’s article put it:

    “Perhaps you don’t hear bleating from the center/center-right because they realize they should be happy enough with what they have (Warren) to not risk the off-chance that the alternative is worse (from their perspective)?”

    Right-wing, “libertarian” talking-heads and pundits rarely strike me as a naïve.

    In Australia, we’ve had recently a clear demonstration that, when their interests are really at stake, large corporations can act quite publicly and decisively against a government.

    Justified or not, to me it’s telling they are not doing the same in the US.

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