From Alex Tabarrok.
What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.
Hundreds of millions of dollars have been spent on designing and implementing disclosure rules for such products as home mortgages. Has there been a single case of a consumer who read such a disclosure and made a better decision as a result?
It is an excellent sentence. But it’s important to keep in mind that the conditions for rent seeking are hardly some unfortunate and unintended consequence of naive paternalistic regulation. The politician usually favorrs anything that offers increased opportunity for graft, and is happy to use the rhetoric of necessary protective regulation as a rationalization.
Indeed, the best outcome from the politician’s point of view is not to create a permanent rent and only be bribed once, but to become a de facto partner in the rent extracting enterprise and get constant legal dividends / kickbacks from the state created supplier surplus. This is done through the tactic of perpetual reverse-rent seeking called ‘juicing’. That is, the politician creates a special privilege, but then routinely manufacturers the same ‘reform’ effort that threatens to remove the rent. Unless the company pays out, of course, which they constantly do, as a regular cost of doing business.
I suspect that this juicing tactic is in the background of the story of the epipen price hike. It looks like ‘insanity’ to keep reintroducing the same ban on generic-forestalling, constraint on trade contracts, only to see the bill predictably fail over and over. But Mylan pays out every time to the tune a million dollars.
Meanwhile that money comes at least partially from mandatory public expenditures on the devices, and so the politician has the ultimate victory of being funded indirectly from their control over tax dollars, laundered through this subtle complex.
We just watched the entire world shudder due mainly to regulatory violations committed by the largest banks in the world.
Now somehow that is forgotten and someone is advocating not informing consumers.
BTW,
35 years in banking and I can tell you that consumers want to know what is going on and do not want it buried in some subsection with really, really small print
Some fascinating stories(almost all concerning total corruption) from the old heads I worked with when I first got into the business. One of my favorites was simply lying about term, rate, etc. Fairly common before the TIL laws.
I have been in the mutual fund business for over 35 years. The only people who peruse prospectuses are attorneys, and then only after a period of poor performance.
Laughable regulations make the prospectus useless to actual investors, since it does not describe what is actually taking place in the fund. It’s merely a kitchen-sink recitation of every possible risk the fund managers can think of. This is to minimize the risk of a successful shareholder lawsuit, again only after a period of poor performance.
I knew mutual fund prospectuses intimately when I worked for 10 years as a paralegal for a mutual fund family. Proofread every d*mned word of them for form and content.
Funniest experience I ever had was following the various outside counsels’ reviewing lawyers redlining sequential versions for their back ‘n forth argument about “that” vs. “which” for dependent clauses. All billable time, of course….
I always used to wonder how many investors ever asked for the “Statement of Additional Information” that was offered “upon request.”
“Why must every aspect of commercial life be governed by a gun?”
This may be the single best encapsulation of libertarianism I have ever seen.
Can’t I be against rent seeking and fraud at the same time?
Alex doesn’t appear to be against disclosure regulation because he doesn’t think its efficient, but simply because its a regulation. If a regulation could be proven to have a net positive effect Alex would still be against it.
“Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.”
If a regulation is good, and related rent seeking is bad, lets keep the law and fight the rent seeking. Alex’s very statement proposes that the regulation is on net good, but it should be abandoned anyway because someone might use it to rent seek.
Shouldn’t your question be ‘has this ever saved someone from a lawsuit or ended it early’ and I would expect the answer is most likely yes.
Or even, did a firm ever think twice about something shady due to reporting, disclosure, audit, or transparency rules?
When I bought my house we were laughing about the fact that we had to sign so many forms, including some of the required disclosures about how much interest we would pay out over the course of the loan. The title person actually said that one person actually looked at the form and ended up pulling the plug on the purchase. Of course, total interest paid maybe look just like a big scary number to someone who is not financially literate, so the disclosure may have ironically led to a worse decision
“Has there been a single case of a consumer who read such a disclosure and made a better decision as a result?”
The opposite seems much more likely — there are so many pages upon pages of disclosures in a mortgage now that it would take an heroic effort to wade through them all, so nobody does — it’s just an exercise in ‘sign here, initial here, sign here, initial here’ until you finally get to the bottom of the pile.
The idealized ‘informed consent’ and ‘meeting of the minds’ of the common law of contacts is of course a complete legal fiction these days. These lengthy disclosures and agreements are read and understood by nearly zero actual ordinary consumers. We only take them seriously because it is convenient to our legal procedures to do so, faute de mieux.
Does it count that a read very carefully through all the paperwork at a close on a house [some 10 years ago and to the consternation of everyone else there] and pulled the plug upon finding a ‘problem’ disclosed?
I told them I’d be back to close on the original agreement after the offending item had been removed. I have seldom seen so many so unhappy people that close up.
They all caved and we closed two weeks later. After I read the entire thing again.
I recall reading a mortgage very carefully one long night, thirty years ago, looking for one specific item — penalties for early payments on principal — before I signed. I didn’t find anything to really object to and signed all the forms happily in the morning — but I don’t think the time was wasted.
The movie Brazil (Terry Gilliam) includes many scenes where the normal people are just signing signing signing some form or other, in triplicate or more.
It’s not clear that it really stops the lawsuits, tho it does offer lots of billable hours to the lawyers.
(Now … there’s one thing, I’m certain of, return. To our, Brazil … youtube theme song)