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...

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?

Losing Jobs

Originally written: October 6, 2011

Steve Jobs died yesterday, at the young age of 56. The homages pour in from all over the world, on machines and via communication methods that he popularized and gave to the masses. 

The world is vastly richer, more pleasant, and a more exciting place to live and learn thanks to this one man, someone who gave us not only Toy Story but the most magical Toy Store the world has ever known, filled with the most amazing and engaging gadgets and tools.

Jobs once said, asked to comment on Bill Gates’ giving away most of his fortune, “My congratulations to Bill. He has realized there’s no benefit to being the richest guy in the cemetery.” But Steve Jobs likely will be the richest guy in the cemetery—not in terms of the money he earned…you really can’t take that with you…but in terms of the wealth he created each year for society…which, sadly, he must now take with him. It is lost to us as we move forward.

It is perhaps not the time, with Jobs’ passing less than 24 hours in the past, to focus on current politics. But as I ponder the loss of Steve Jobs, I can’t help but thinking of Elizabeth Warren with her stump speech —really, what wealth has she bestowed on society?—, explaining that Steve Jobs didn’t literally make the iPad and the iPhone and all the rest entirely on his own, and therefore he has to pay back, as if flooding the world with iPads and iPhones wasn’t enough, as if creating hundreds of thousands of high paying jobs throughout the globe wasn’t enough. I can’t help but thinking of President Obama, condemning billionaires. The White House released Obama’s homage to Jobs this morning: “America has lost a great visionary.” But we all know what he was really thinking: “America has lost a great visionary who didn’t pay enough taxes.”

Obama is pushing the idea that “billionaires” don’t pay enough, pushing the view that their wealth is unearned, pushing the view that people like Jobs get rich by taking from others rather than creating immense wealth for society. Pushing class warfare.

Warfare is generally something to avoid. Peace is preferred. But there is a saying from Jobs’ youth that comes back to haunt…No justice, no peace.

Elizabeth Warren: Clinging to Guns and Religion…

Originally composed: October 3, 2011

Referencing small-town Midwesterners at a 2008 San Francisco fundraiser as “people who cling to guns or religion or antipathy to people who are not like them”—candidate for President, Barack Obama

Elizabeth Warren has been a good friend of Barack Obama’s since his 2003 fund-raiser for his Senate race at his alma mater, Harvard Law, where she is a professor, and where they first met. It was she who developed the idea, such as it is, of a federal “consumer protection” agency and, per Obama’s recess appointment, briefly held the position of agency czar without the necessity of Congressional approval. Now she is running for Scott Brown’s (ahem…excuse me…Ted Kennedy’s) seat in the U. S. Senate. Should she win, she would be part of the political elite that determines where federal power—the government’s guns—is directed. It is a power she seeks to cling to. She made a statement recently that bears analysis…

Warren, as befits a Harvard Law professor, has some clear ideas on issues of social justice. She recalls, it appears, the tales of life in Hobbes’ state of nature: solitary, poor, nasty, brutish, and short. We all benefit from society. As Warren elaborates: “There is nobody in this country that got rich on their own. Nobody. You build a factory out there—good for you. But I want to be clear. You moved your goods to market on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of the police forces and fire forces that the rest of us paid for…” Warren concludes this justifies yet higher taxes on “the rich.”

Economist Russ Roberts, professor at George Mason University in Virginia, had a great response to Ms. Warren in the 9/29 op-ed page of the Wall St. Journal. It bears reading, but I want to say more…

I suspect Ms. Warren took a class in political philosophy at Harvard taught by the revered John Rawls. Her language is reminiscent of that found in Rawls’ highly praised A Theory of Justice, which argued that deviations from egalitarianism—a completely equal sharing of society’s wealth—are justified only to the extent that they better the condition of society’s worst off. He argued that behind a “veil of ignorance,” where people make choices unaware of their actual status in society (well off or poor, talented or handicapped, etc.), this is what people would choose. They would argue to the hypothetically better off much as Warren argued at her campaign event: “Hey better off! You can’t accomplish anything without our help. So we should get everything up to the point where to attempt to give us more would actually make us worse off. Those are our terms and conditions for social cooperation.”

Ms. Warren has taken to this text religiously. She no doubt views as apostasy the response found in Anarchy, State, and Utopia, the 1975 National Book award winning text by Rawls’ fellow Harvard philosopher, the late Robert Nozick. Nozick pointed out that Rawls’ argument is completely symmetrical, and as such cannot justify his conclusion. Based solely on the fact that social cooperation yields a greater product than atomistic efforts, Nozick pointed out, the Better Off could respond with equal (which is to say, little) justification: “Hey worse off! YOU can’t accomplish anything without OUR help. So WE should get everything up to the point where to attempt to give us more would actually make US worse off! Those are OUR terms and conditions for social cooperation!”

Rawls’ argument is not as strong as he thought. It doesn’t do the work he hoped it would. To make an analogy, consider a Thomist offering his Argument from Design. Even assuming that this proves the existence of a creator God, it does not, despite St. Thomas’ belief, prove the existence of the Christian God, complete with Trinity, Eucharist, and papal infallibility. It could equally well prove the existence of Zeus. To prove a Christian God, more is needed. So, too, much more is needed than the mere observation social interaction leads to benefits for all to justify the God of progressive taxation at whose feet Warren worships. Warren’s argument would equally justify a flat tax. But she cannot see it. Too many things get in the way. For one, her antipathy to people who are not like her, people who produce goods and services rather than words and arguments; people rewarded by customers and clients rather than judges and administrators; people who are competent rather than merely clever. Because of this antipathy, Elizabeth Warren clings too firmly to her guns—of which the State she seeks to join controls so many—and her religion. She is a devout believer in the Omnipotent State.