While we weren't looking, Barney Frank sold us out on the Consumer Financial Protection Agency
Via the terrific Interfluidity, this very important post. First, let's look at "vanilla products," in this case for financial services:
Vanilla products would be very popular, which is why they are so threatening. Financial services are an area where markets not only fail due to informational problems, but where participants are very aware of that failure. Consumers know they are at a disadvantage when transacting with banks, and do not believe that reputational constraints or internal controls offer sufficient guarantee of fair-dealing. Status quo financial services should be a classic "lemons" problem*, a no-trade equilibrium. Unfortunately, those models of no-trade equilibria don't take into account that people sometimes really need the products they cannot intelligently buy, and so tolerate large rent extractions if they must in order to transact.
Lambert here. The 30 cents of every health care dollar that goes to health insurance companies is one such rent. "Progressives" believe that such "large rent extractions" are painless, and that we should not only tolerate them, but subsidize them for people who cannot pay. Single payer advocates believe that the extraction is not painless, but pernicious, and that we should abolish it entirely. Since health
care insurance reform is the administration's signature domestic initiative, most of us have had our attention focused there. If the focus had been financial reform, a similar conflict would no doubt have played out, with the Neo-Broders seeking to ameliorate and preserve rent extraction by banksters, while the left would have sought to abolish it, through proposals like making banks into regulated public utilities, and so forth.
The price of assuring that one is not taken advantage of by financial service providers is not participating in the modern economy. You cannot have a job, because payments are by check or direct deposit. You cannot buy a home or a car, because for the vast majority, those purchases require financing. Try travelling with only cash for plane tickets, hotel rooms, and car rentals. People will "voluntarily" participate in markets rigged against them for the privilege of being normal. And we do, every day.
But define a reliable vanilla option, and the dynamic flips on its head. Instead of tolerating rent-extraction as a cost of participation, consumers put up with one-size-fits-all products in exchange for peace of mind.
Lambert here. Now, ask yourself what kind of insurance product will end up being sold on the health exchanges. Will it be a vanilla product -- single payer being the ultimate vanilla product -- or will it be a complex, "innovative," and heavily marketed product? I don't know, but I think I can guess.
Most consumers benefit very little from exotic product features, and I suspect that many are made deeply nervous by the complex contracts they can neither negotiate nor understand, but nevertheless must sign. Vanilla financial products would be extensively vetted and and their characteristics would soon become widely known. Inevitable malfunctions would be loudly discussed in the halls of Congress, rather than hushed-up in rigged private arbitrations. Vanilla products would face discipline both from private markets (no one is suggesting we forbid other flavors) and from a very public political process. Politics and markets are both deeply flawed, but they are flawed in different ways, and we should take advantage of that. In Arnold Kling's lexicon, a market in which vanilla and exotic financial products coexist and compete offers the benefits both of exit and of voice.
Rather than being anti-market, vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market.
That's because the status quo is not even capitalist, but kleptocratic. And so we come to Barney Frank!
Extracting the vanilla from the CFPA is not, as Felix Salmon put it "the beginning of the end of meaningful regulatory reform". It is the end of the end. Vanilla products were the only part of the CFPA proposal that was likely to stay effective for more than a brief period, that would be resistant to the games banks play. All the rest will be subject to off-news-cycle negotiation and evasion, the usual lion-and-mouse game where regulators are the rodents but it's the rest of us that get swallowed.
Wall Street's favorite comedian-politician, Barney Frank, was very savvy in framing the debate over the issue with his well-placed mischaracterization of vanilla products as "anti-market". That is bass-ackwards. The vanilla option is pro-market, because it is procompetitive. Of course, that is precisely why banks hate it: Vanilla products would turn basic financial services into a commodity business, and force providers to compete on price.
Exactly. Can't have that! When did a business that competed on price ever offer big bonuses?
Again: It's all about the fees, baby!
The rents! A big fat private tax that we pay to corporations who force us to by products we don't -- and can't -- understand.
Feel the suck?
NOTE * A market where the seller has much more information ("information asymmetry") than the buyer -- like a market for used cars, where the seller knows what's wrong with the car, but the buyer may not be able to detect it; hence the danger, for the buyer, of getting a "lemon." The common factor between the markets for used cars, financial services -- and, I might add, health insurance -- is information asymmetry. Information asymmetry -- also known as "innovation" -- creates rents.