Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.
…The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail.
Pointer from Mark Thoma.
It may seem surprising that I agree with Senator Warren on both of these points. However, I disagree that the Consumer Financial Protection Board is taking the best approach to solving the problem of skilled financial firms exploiting less-skilled consumers. As I wrote here,
Regulated industries are always ready to complain about the cost of complying with bright-line regulations. However, I have the opposite objection. Particularly when it comes to the financial sector, compliance with BLR is far too easy. The bankers are always able to outmaneuver the regulators, staying within the letter of the rules while mocking their spirit.
That essay is where I proposed principles-based regulation as an alternative.
Then the approach is to bring two principles into conflict so one can choose which one to follow.
You’re naively assuming that this politician sincerely cares about solving the problems she’s identified. Another possibility is that she is using those problems cynically as a pretext to advocate for further extending government control of finance, while doing nothing so solve the problems or about the “inequality” politicians of this ilk blather about so much.
“Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. ”
Is this true, or is it like, “This is the first generation that will be worse off than its parents.”, and we can just keep saying it forever without any evidence because it’s so easy to agree with? And, I don’t think it would be evidence to say it’s true just because fees happen to take on a larger nominal role in a zero interest rate environment.
———–
“These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. ”
FICO scores of borrowers were fairly level during the housing boom, the relative income of the median mortgage holder was fairly level, home prices are being bid up to similar levels today with absolutely no help from the mortgage industry, and banks in general remained viable until 2008 when home prices had dropped around 25% in nominal terms, which seems pretty reasonable to me. This statement may be right, but I think we should keep in mind that if it informs any major policy ideas, there is some chance that it is wrong.
————
Senator Warren is for highly complex financial legislation to solve these problems, which, among other things, serves as a jobs program for Senator Warren and a constant source of photographed indignation.
My first inclination is if you (or I) agree with them, you or they misunderstood what they really meant.
If banks were oppressed, would she still be for the same regs?
What are the actual proposals btw?
Here are mine. Enforce contracts (instead of vaguely saying banks are tricksy). Living wills (So the government can strap on a backbone at bailout time). Bonus is that the fed should actually lend freely at a penalty rate.. My second lame duck term I’ll bring up competing currencies.
Paul Kupiec of the American Enterprise Institute has a nice talk in which he portrays Bernanke, Yellen, Fischer and the other big names in monetary, financial and banking regulation as Marvel and DC Comics superheroes… Very funny, but the point is, Yes, okay, let’s regulate better… Who’s going to do it? Where are the superhuman regulators who can see into the heart of markets and figure out what banks are going to do before the banks themselves do?
I too am angry at a lot of the banking and financial shenanigans, but I don’t see how naive regulation is going to help. As John Cochrane said, regulation is not like pouring beer into a glass: a little more, a little less…