Corporate & Securities Law

Good luck, Prof. Warren

Assistant to the President and Special Advisor to the Secretary of the Treasury? (nee Professor) Warren makes her opening salvo on the future of consumer finance with remarks on the White House blog today. See here. In a post entitled “Fighting to Protect Consumers,” she writes: “The new consumer bureau is based on a pretty simple idea:  people ought to be able to read their credit card and mortgage contracts and know the deal.” Seems pretty innocuous — who can be opposed to clarity? Not me. The questions are (1) will it work? and (2) will the benefits exceed the costs? I’m skeptical on both counts. I don’t doubt the sincerity of Prof. Warren or the purity of her intentions. I just doubt the ability of regulation to do much good here.

Specifically, my colleague Omri Ben-Shahar has written extensively on this subject (and is teaching a course on it this Fall), and concluded that the results of mandated improvements in disclosure to consumers are worthless or worse. See, e.g., here. His key takeaway: “mandated disclosure not only fails to achieve its stated goal but also leads to unintended consequences that often harm the very people it intends to serve.” There have been dozens of statutes on this subject going back to the 1970s, and none of them have worked.

It is possible that Prof. Warren will read Prof. Ben-Shahar’s work and correct the errors of the past. But even assuming she tries, this misses the larger problem with regulation. Whatever one’s intentions (good, I assume) and information, the regulatory process is flawed by its very nature. Regulators are humans, which means they make mistakes and are subject to capture by the regulated. Errors of judgment and innocent mistakes will be undisciplined by competition. Prof. Warren, her staff, or their successors (say, under a Palin administration) will be captured by the regulated and special interests. Lawsuits will add unnecessary complexity. The regulated will push the new rules in unexpected directions, assisted by generally more able counsel and motivated by billions of dollars instead of a simple urge to do good on the part of the regulators. Perverse alignments of interest will develop. For instance, large finance companies will prefer more regulatory costs, even when they add no value to anyone, since these costs will serve as barriers to entry for start ups or other new entrants. In short, those who currently may be able to get credit but not fully understand it will no longer be able to get credit (due to increased costs) or understand it. Relatively transparent and policed forms of credit (like credit cards) will be replaced by less desirable ones (like check cashing stores or loan sharks). Of course, I could be wrong. Maybe this time the regulators will get it right. My speculation is based on nothing but the experience of nearly every regulation for a hundred years.

I sincerely wish Prof. Warren good luck. If she can truly make consumer finance more efficient, she will not only be a hero of liberals but of us all.

Full post as published by Truth on the Market on September 17, 2010 (boomark / email).