If you have "no place to go," come here!

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.

No votes yet


BDBlue's picture
Submitted by BDBlue on

I'd do it, but perhaps there's a reason why you didn't?

The CFPA is one of the few reforms that could do most Americans some good and not enough people are paying attention as it gets the "public option" treatment - watered down until there's nothing left but a marketing phrase.

Submitted by lambert on

All fellows can sticky... Though I'm going to need to sticky a Hamster-related post later today...

DCblogger's picture
Submitted by DCblogger on

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.

Atrios has done an outstanding job of exposing Versailles financial follies.

Submitted by lambert on

And he's about the only one. If I did content analysis on Palin vs. financial issues, which do you think would come out ahead?

gqmartinez's picture
Submitted by gqmartinez on

The right is trying--and will probably escalate--a populist effort, as has been discussed here previously. We need to make sure there is a valid liberal alternative. And removing liberal from whatever the fuck the Dems are doing is going to be very important.

I'm not sure the "rent" terminology is, though accurate and informative, is the best way to frame what's going on. It requires too much explanation. Not that people aren't smart enough to follow, but given our disadvantage financially in the PR department, we need to be more concise.

Submitted by lambert on

"rent" is the term of art for economists. "Theft" is both too broad (covers things that aren't rent) and too small (gives no idea of the scope -- trillions).

Which is why I'm trying out "private tax."

BDBlue's picture
Submitted by BDBlue on

I realize that "corporate tax" is already taken (although given so many corporations pay so little taxes to the govt. and we pay so many to them, perhaps it's due to be rebranded). But something that works in the idea of paying taxes to large companies might work better than simply private tax (company tax? I dunno, I suck at this). "Private" often has positive connotations that corporate doesn't have.

gqmartinez's picture
Submitted by gqmartinez on

That's what Obama's Democratic party is doing with our money. Same as what the GOP was doing.

CMike's picture
Submitted by CMike on

Merriam-Webster Online says:

windfall 2: an unexpected, unearned, or sudden gain or advantage

How about "unearned gain" or "gains"? The word "unearned" raises, if not the progressive's, then certainly the populist's blood pressure. The word "gain" is the dead on one for the return on capital. Or how about "unfair gains"? Your rhetorical assault is underway when you've led with the word "unfair."

Then you'll need a carefully prepared one paragraph explanation, at the ready, when challenged about what you mean. Remember, repetition and consistency are keys to a successful sales campaign. (And when giving an oral presentation, not only be at the ready with what you are going to say, but talk fast.)

And then there's getting into the weeds. Realize that the idea that economic rent should be public property has long had support, support which has been spread out among a surprisingly wide range of intellectuals and activist types:

Henry George is best known for his argument that the economic rent of land should be shared by society rather than falling into private hands. The clearest statement of this view is found in Progress and Poverty: "We must make land common property." Although this could be done by nationalizing land and then leasing it out George preferred taxing unimproved land value, in part because this would be less disruptive and controversial in a land where titles have already been granted to individuals. With this "single tax" the state could avoid having to tax any other types of wealth or transaction.

Introducing a large land value tax causes the value of land titles to fall correspondingly, but George was uncompromising about the idea of compensation for landowners, seeing the issue as a parallel to the earlier debate about compensating former slave owners.

Modern economists like the 1976 Nobel Memorial Prize winner Milton Friedman agree that Henry George's land tax is potentially beneficial because unlike other taxes, land taxes impose no excess burden on the economy, and thus stimulate more rapid economic growth. Modern-day environmentalists have resonated with the idea of the earth as the common property of humanity – and some have endorsed the idea of ecological tax reform, including substantial taxes or fees on pollution as a replacement for "command and control" regulation.

The modern economy is not land based, of course, so Henry George does need some updating.

Submitted by lambert on

Rent and tax (and privatized tax) have this connotation.

Also, the analogy to robber barons is exact: Pay me, or I don't raise the chain across the river and your boat won't pass.

I suppose "toll" would be another possibility.

It's not surprising, of course, that we don't really have a word in circulation for this.

Valhalla's picture
Submitted by Valhalla on

at least, in the health care debate, that has a lot of resonance. Everybody who's ever needed a doctor, or has someone they care about who has needed a doctor (aka everyone) understands what it's like to be on the wrong end of the "kick 'em when they're down" philosophy of the BIPs. Even people who, in other contexts, are very supportive of a corporation's "right" to make a profit are attune to the inherent immorality of profiting from someone else's pain and misery.