Thursday, March 22, 2012

Elizabeth Warren, Easily Understandable Financial Forms, and Chutzpah... , Part I


I wrote a piece several month’s back on Elizabeth Warren, and whimsically entitled it “Elizabeth Warren: Too Liberal for Massachusetts?” Well, it turns out I may have been correct...
A new poll released in early March by the Western New England University Polling Institute in partnership with The Republican newspaper of Springfield found Senator Scott Brown leading Warren, his top Democratic challenger, 49 to 41 percent. That closely reflects several other surveys taken in the last month that also show Brown with a lead well beyond the margin of error.
But that’s not the point of this post. That’s just ironic follow up. And obviously polls can change between now and November. But it IS revealing, given the well-deserved bashing many Republicans have faced suffered on social issues, which clearly can’t play well in Massachusetts.
Anyway, this post involves another irony, one based on Warren’s putative reasons for desiring to set up an agency to protect consumers, especially the poor, from market transactions, especially financial ones. 
One website explained the function of Warren’s brain child, the Consumer Financial Protection Agency: “The proposal to establish a federal Consumer Financial Protection Agency (CFPA) was at the center of the Obama administration’s overall plans to overhaul financial regulations. This agency...would take certain consumer regulatory responsibility of financial products from seven other agencies and centralize it in one office. As originally conceived, it would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws. It would be empowered to make rules, examine balance sheets and issue subpoenas. Any institution that provides consumer financial products such as mortgages, credit cards, student loans, auto loans, payday loans, and other consumer products...would fall under the agency's jurisdiction. The agency would...oversee new consumer financial products.” Ms. Warren has never been accused of humility, or failure of grand vision.
One of Warren’s justifications for such an agency is her view that financial forms are overly complicated: “On May 18, 2011, the CFPB launched its ‘Know Before You Owe’ project...an effort...to combine the Good Faith Estimate...and the Truth in Lending Act disclosure...into a single two page form.  According to Elizabeth Warren, ‘[t]he current forms can be complicated and difficult for consumers to use.  They are also redundant and can be costly for lenders to fill out.  With a clear simple form, consumers will be in a better position to answer two basic questions:  Can I afford this mortgage and can I get a better deal somewhere else?’” 
This leads to two rather obvious questions:
  1. Why are these forms as complex and confusing as Warren notes them to be? If they upset consumers who don’t understand them AND they are costly for the lenders to fill out, isn’t it surprising we had to wait for Elizabeth Warren to save the day? Generally markets are pretty darn efficient at noting win-win scenarios. In other words, why are these forms so complex now?
  1. In searching for an organization dedicated to making forms and rules simpler and more user-friendly, is the federal government really the first place to turn?
How simple, for example, are the laws under which we live? Financial forms are, of course, important, but if you sign a mortgage you didn’t really understand, at worst you and your immediate family suffer; that is, the costs are internalized. If legislators create laws that people can’t understand, that affects all of us, not just the lawmakers; that is, the costs are externalized. 
And if you don’t understand every jot and tittle of your mortgage, at worst you might pay a late fee or maybe even be foreclosed on. If you don’t understand a law and violate it, you might be thrown in prison and have your rights removed, rescinded, or restricted. So it seems reasonable, before giving federal bureaucrats power over how our financial forms should be simplified, to see how well they’re doing at their primary job of writing laws.
In the March 9th Wall St. Journal, reporter Joe Palazzolo , noted, “Federal judges across the country have lashed out against poorly-written, 'tortuous' Medicare and Medicaid text.  ‘Picture a law written by James Joyce and edited by e.e. cummings,’ wrote Chief Judge Royce Lamberth of the U.S. District Court for the District of Columbia, in a January ruling in a Medicare case. Last September, Judge Gilbert S. Merritt Jr. of the Sixth Circuit lamented Medicare's ‘tortuous text.’ ‘An aggravated assault on the English language,’ is how the Supreme Court characterized the Medicaid statute in a 1981 opinion, quoting a federal judge in New York. 
“A typical provision of Medicare, for instance, reads like this: ‘In the case of a plan for which there are average per capita monthly savings described in section 1395w–24 (b)(3)(C) or 1395w–24 (b)(4)(C) of this title, as the case may be, the amount specified in this subparagraph is the amount of the monthly rebate computed under section 1395w–24 (b)(1)(C)(i) of this title for that plan and year (as reduced by the amount of any credit provided under section 1395w–24 (b)(1)(C)(iv) [2] of this title).’ Got that? 
“The Dodd-Frank financial law [which Warren strongly supported] runs a brisk 2,300 pages. President Obama's health-care law is more than 900 pages long. Medicare and Medicaid are just part of a distinguished history of judicial disdain. Other laws have also been criticized for their dense writing. For decades, sharp tongues on the bench have lashed at the stubborn complexity of the tax code.” 
The Economist magazine had a recent article, “Too Big Not to Fail,” (2/18/12), referring to “Dodd Frankenstein.” In part the article says:
“The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. [Foreign lenders] have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one... And the size is only the beginning. The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: ‘Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.’ Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.
“Take the transformation of 11 pages of Dodd-Frank into the so-called ‘Volcker rule,’ which is intended to reduce banks’ ability to take excessive risks by restricting proprietary trading and investments in hedge funds and private equity (Paul Volcker, a former chairman of the Federal Reserve, has argued that such activity contributed to the crisis). In November four of the five federal agencies charged with enacting this rule jointly put forward a 298-page proposal which is, in the words of a banker publicly supportive of Dodd-Frank, ‘unintelligible any way you read it’. It includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. The interactive Volcker ‘rule map’ Davis Polk has produced for its clients has 355 distinct steps.” [bold added]
Well, that sounds much simpler…
And we haven’t even mentioned yet the tax code…
The idea that one should turn to the government to SIMPLIFY forms and rules is really a striking absurdity. One would as reasonably have Girl Scout behavior rules written by registered sex offenders.
Tomorrow: Why ARE Those Forms So Complex?

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