Tuesday, August 17, 2010

Ideal Regulation: Making choice transparent

David Leonhart (HT: Blattman) opines on how the newly created consumer bureau to protect consumer interests in finance -- ever notice how many assumptions you can pack into three words? -- can do that better: work on reducing informational asymmetries rather than command and control:
For as long as there has been money, people have been doing stupid things with it....
The overriding goal of the bureau will be to help people understand their financial choices. More often than not, it will allow banks to continue a given practice — but force them to explain, in clear terms, what it means for consumers. Earlier this summer, I refinanced my mortgage and ... Nowhere in the pile of documents was there a simple explanation of the only information that mattered to me: how much the bank was charging in fees, how much the lawyer was charging, how much the government was charging and how much my monthly payment would fall. Instead, I was confronted with a blizzard of terms that I did not fully understand....
Done right, the new bureau can begin to change this. It can require banks to speak in the language of customers, not internal bureaucracy. ... last year’s credit-card legislation offered a preview. As of February, banks have had to give people the often-bracing calculation of how much it will cost them to pay off their balance if they make only the minimum monthly payment, as well as how many years it will take. To see if such steps are working — and to keep pace with Wall Street ingenuity — the new bureau will have a research budget allowing it to test whether consumers truly know what they’re signing up for.
The ultimate goal is pushing banks to compete in ways that benefit consumers, rather than having them compete over which methods can most cleverly fool consumers.

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