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Hollywood for CFPA

Hollywood for CFPA

Courtesy of Eric at FALKENBLOG

A bunch of legendary comedians got together to make a sketch, where the punchline is: "establish a Consumer Financial Protection Agency". It’s kinda a funny, but mostly because of the Darrell Hammond’s imitation of Clinton making sexual innuendos, and Fred Armisen’s impersonation of Barack Obama. It seems director Ron Howard was trying to find something to ‘do good’, so he chatted with the earnest and overeducated Elizabeth Warren, and decided consumer financial regulation was the kind of smart idea that would obviously work. After all, who’s against consumer protection? 


I am! This is the same government that goaded banks to lower standard to lend more to historically damaged communities, and then when those borrowers defaulted, blamed such lending on the banks. Avoiding the poor is redlining, targeting the poor is predatory, which means, whatever goes wrong can be blamed on the banks. Government always wants to have its cake and eat it too: low taxes & high spending, high growth and union-type work rules, banks lending more today and raising their capital. 

The CFPA tries to do what most regulators try to do: improve efficiency, eliminate waste, consolidate regulations,simplify regulations, protect consumers, and protect jobs! It seems banks are greedy and basically uregulated, leading directly to the 2008 housing crisis. There are seven government bodies already regulating banks, highlighting how incredibly naive this proposal is. If there’s a magic bullet for improving efficiency, etc., share it with existing regulators…unless you think that all the regulators have been captured by some interest group, which if true just means we are bringing in one more interest group to advocate why they should get a better deal.

More importantly, if your concern is about the irrational poor people easily duped by huckster bankers, lower prices and penalties on the poor doesn’t help them, it enables them. Life has carrots and sticks, and one definition of a vice is that which generates bad outcomes in the long run. If you are constantly overdrafting your account, don’t have enough money to make a 20% down payment on a property, you need better financial discipline. Helping the poor from being trapped by debt should try to minimize they amount of debt they have, say by increasing rather than lowering prices on credit cards. That would still allow emergency spending, but make people do it much less, which is a good thing. 

It’s like alcohol. You want to tax it sufficiently that making beer in your basement is not better (because then it will lead to illegal activity and lower quality control), but not so cheap that being a career drunk is easy (note that Cuba and the Soviet Union have very cheap booze prices--they want the populace perpetually inebriated). 

One key to the housing bubble was the credit underwriting standards fell: no verification of income, no money down, etc. Basically, people got loans they could not afford. So this agency is intent on doubling down, assuming the problems before weren’t because too many people had loans, but rather, bankers were greedy. Bankers want to maximize profits, but politicians want to pander via expropriation and cross-subsidizing. Which is better in the long run to an economy?

Politics is all about pandering egalitarianism, treating everyone the same regardless of their risk or behavior. As Joe Stiglitz knows, this leads to inefficiencies, because when you don’t price according to cost (as reflected by higher default rates), you get more adverse selection in that the highest cost customers find the product most attractive, leading the best credits to leave, and ultimately rationing of those best credits. As Stiglitz ‘proved’, this is an inefficient equilibrium. But if government is running the show, such inefficiencies are all ok, because government merely adds more regulations, and so on. When the businesses fail, they almost always go out of business (unless they are really big); when government fails, it just increases its mandate’s scope. 


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