Friday, March 23, 2012

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

Yesterday, arguing against Harvard law professor cum Democratic Massachusetts Senatorial candidate Elizabeth Warren’s concept of using the federal government to simplify financial forms, we noted how incompetent the federal government is at writing simple laws…
But the question remains, why ARE these forms so complex? It turns out this is not a result of market failure--that is, it is not the result of the actions of a competitive marketplace, such that a zealous regulator like Warren must intervene. As one former HUD employee put it, the complexity in the financial forms is mostly driven by government. According to one legal scholar specializing in financial law, these forms became more complex as a result of industry response to the 1968 Truth in Lending Act. Let Wikipedia describe the act’s requirements:
“Subpart C relates to closed-end credit, such as home-purchase loans and motor vehicle loans with a fixed loan term. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission, non-requirements, and advertising...
“Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures which if used properly will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.”
With all these legal mandates for disclosure, do you think the length of a contract might increase, and the elaborate legal terminology that is Greek to layman might expand?
As with many financial regulations originating in Washington, unintended consequences abound. For example, Warren’s CFPA is responsible for a new form found on your credit card statements--ignore for the moment the increased costs associated with this new requirement, and how that impacts the fees banks charge customers for credit card use. It consists of a prominent black-bordered box that lists the amount you would end up spending if you paid only the minimum required payment each month to pay off your card. The box also lists how many months--typically several years--it would take.
Warren was concerned poor people with credit cards--the sad impecunious dolts--didn’t understand how financially bad it was to not pay off their credit cards quickly. And if all credit card holders made Warren’s high six-figure annual income, paying off one’s credit card quickly would no doubt be reasonable advice. The choice between paying off your credit card debt more quickly versus buying food or paying the rent or repairing the leaking heater--these are more challenging decisions Ms. Warren typically needn’t worry herself about.
Meanwhile, a study was done to determine exactly who a) never pays more than the minimum amount, and b) stops using the card for additional charges until the credit card is paid off. These would be the only people to whom this mandated monthly calculation is pertinent or accurate. Turns out the answer is 4% of people. This is what Warren considers an efficient regulation.
Meanwhile, in the real world of unintended consequences, it turns out that far from preventing people from wasting their money on interest, the newly provided boxed information, prominently displayed, has led MORE people to start paying only the minimum required amount, the exact opposite of Warren’s desires or intentions. It is like the result found by economist and risk expert Kip Viscusi on the dangers of cigarettes. Viscusi analyzed the data and determined that if Americans knew the real risks of cigarette smoking, 6% MORE would begin to smoke. That is, Americans over-estimate the health risk of smoking. Apparently they also over-estimated the costs of credit card interest until Elizabeth Warren made it plain to them…
It has been pointed out by admirers of Warren, that hers is a Horatio Alger story. It is true. Born into relative poverty, into a large family, she worked herself up to the point where her natural intelligence and drive have led her to the pinnacle our meritocracy, our economically mobile society, can offer: a Rutger’s law degree leading to a Harvard law professorship, hobnobbing with the rich and powerful of Washington. She did it on her own. She knows how much she stands out from the crowd of the Oklahoma City working class into which she was born. No wonder she thinks they need her help. She knows how much smarter she is than they. Clearly without her designing regulations to help them, she thinks, they will never be able to help themselves. 
But smart as she is, she has little knowledge or understanding of markets, seems oblivious to unintended consequences of regulations, and her efforts to micromanage financial markets create costly additions that now must be borne by those working class folks she long ago left behind, and whom she never viewed as equals.
Warren thinks that because the working class she knew could never articulate financial trade-offs to the degree she can, that therefore they do not understand them. But knowledge can be functional even if inarticulable. For example, growing up in working class Oklahoma City, Warren (a Methodist) probably knew few Jews. So she likely never learned to articulate the meaning of the word Chutzpah. Clearly it doesn’t follow that she is ignorant of the concept...


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