History suggests that business doesn’t always know what’s good for it.
Over the past century, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped.
- Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.”
- Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market.
- Bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs.
- Today, while some bankers accept the need for financial consumer protection, they maintain that the C.F.P.B. will go too far and end up strangling financial innovation.
And, at a time when Americans profoundly distrust the financial industry, an Elizabeth Warren-led Consumer Financial Protection Bureau (C.F.P.B.) would likely again turn out to be the friend that the banks never knew they needed.
The core principle of the C.F.P.B.’s work is also a cornerstone of all capitalist economic theory: well-informed consumers make for vigorous competition and efficient markets.
That idea is embodied in the design of the new agency, which focusses on improving the information that consumers get from banks and other financial institutions, so that they can do the kind of comparison shopping that makes the markets for other consumer products work so well.
History suggests that consumers don’t always know what’s good for themselves.
- Most borrowers are too often unaware of how much they’re actually paying and why for financial products because the market for these products doesn’t work as well as most markets do. As we saw with the recent U.S. financial market implosion, the consequences of this are not trivial.
- The housing bubble was a collective frenzy, but it was made much worse by the fact that millions of borrowers were making poorly informed decisions about the debt they were taking on. If people had known more, they might well have borrowed less.
In a world where marketing is all about the lowest teaser A.P.R., all businesses have to play the same game, and you end up with a race to the bottom (kinda like we’re suffering with globalized “free-trade” and labor markets… yes, business initially prospers from reduced costs/enhanced profitability… but then suffers loss of domestic market viability due to decreased household earnings from depressed wages at home).
Look at the housing bubble: any mortgage broker who informed customers that he was being paid to push them into certain kinds of mortgages would have lost business, while financial institutions that initially avoided schemes like no-income-verification mortgages eventually felt compelled to offer them.
The C.F.P.B. hopes to change this, largely by insuring that consumers will be told the true terms of a deal, in a simple and clear fashion. For example, it recently released two possible mortgage disclosure forms, and both were merely two pages long — perfect for reading-averse Americans. This simplicity of information would obviously be good for borrowers, but it would help most lenders, too.
During the housing boom and easy finance years, the banks thought they were taking advantage of uninformed consumers, yet they ended up playing themselves (Oh brilliant financial gurus that they are/were!). Countless lenders have gone out of business, and many of those still standing saw their stock prices decimated after they loaned immense amounts of money to people who couldn’t repay.
In a more transparent credit market, almost everyone would have been better off.