I spent a couple of days last week attending the Federal Reserve Bank of Chicago’s annual payments conference. If you’re involved in the world of retail payments, you should really attend this conference next year. As with other good conferences, what really differentiates this one is the quality of attendees. Lots of really smart people in the room, and what made it even more interesting was the mix of merchants/ retailers, FIs, academics, consultants, and vendors.
For me, the highlight of the conference was the closing session titled “Where Are We Headed?” Based on the panelists remarks, I think the consensus answer to that question is “further down the toilet we’ve already been flushed down.”
The four panelists were Glenn Fodor, Vice President, Morgan Stanley; Ronald Mann, Professor, Columbia Law School; Omri Ben-Shahar, Professor, University of Chicago Law School; and Richard Epstein, Professor, University of Chicago Law School.
Unfortunately for Mr. Fodor, the three academics really dominated the discussion. What the three professors had to say, however, was very enlightening. Their comments touched on:
1. Financial product safety commission. Mr. Mann commented that the prevailing theory underlying the prevailing approach to regulation is that people will spend and borrow more than they should — causing greater level of distress — and that we need to impose behavioral limitations through regulatory actions.
Mr. Mann explained that this theory holds that products exploit consumer behaviors, and therefore need to be regulated. He did go on to say, referring to the proposed consumer safety commission, that it’s difficult to construct a federal agency for this. As Mann put it:
“If you don’t know what makes a product “unsafe”, how can you have an agency to protect consumer safety?”
Epstein jumped in on this point, as well, commenting that “since the Obama administration doesn’t know what’s it doing, it might as well delegate it to an agency that doesn’t know what it’s doing.”
According to Mann, “there is a need in the market for credit products, and therefore, for risky products. Credit cards are an efficient way to borrow money — and the regulations negatively impact this.”
2. Disclosures. Professor Ben-Shahar has studied the role of disclosures in the financial services world, and has concluded that, by and large, they are ineffective. They lead to a “one-size fits all approach to risk” which, in turn, leads to negative impact for everybody. According to Ben-Shahar, there has been “no indication that an increase in disclosures has had any positive benefit.”
Epstein’s comment on this topic was that the government assumes that consumers are too ignorant to do anything but read government forms. But Ben-Shahar pulled out an example of one of these disclosure forms — a four-pager — and asked if anybody in the audience read it when they applied for a credit card. No one raised their hand.
What the professor did suggest, however, was that financial firms should show people how “others like me” deal with the payment burden –- and not just the total amount over the life of the loan.
3. Durbin amendment. None of the panelists were quite as outspoken — or as colorful — as Professor Epstein. Commenting on the Durbin amendment, Epstein called it:
“A monstrosity of the worst intellectual order”
According to Epstein, the guidelines are “all nuts — they only include incremental costs”, and that the result of the rules will be firms that are “too big too succeed” let alone too big to fail. Epstein agreed with a lawyer in the audience who suggested that the amendment will lead to financial firms creating affiliates with less than $10 billion in assets.
I had a chance to talk with Epstein one-on-one after the session, and asked him to comment on my take on the regulations: That they represent a response to an environment (i.e., a market and economic environment) that existed in the past and is no longer valid. And a result of this changing environment, the regulations become less effective or relevant for both the current and future, and furthermore, will only help to retard economic growth moving forward.
He agreed. (Although, he might just have wanted to get out of there).
Fact 1: The Federal legislative process in the U.S. is purely reactive. Every socio-economic event requires new laws, more regulation, more restrictions.
Fact 2: Lawmakers believe the only way they can show they are “doing something” is by passing new laws.
Adding Fact 1 + Fact 2 = mountains of new laws every year that cost more money than the American gov’t has. If we allow the system to run as it is indefinitely, we will eventually legislate our way into the Biggest, Most Restrictive Government in History, quashing both capitalism and personal liberties one law after another.
All sortsa’ fascinating and I’m certain that it makes all sortsa’ academic sense… I’ll even bet that you’re right, Dick Durbin is nuts.
On the other hand, caveat emptor and no regulation results in wholesale economic rape that Mr. Potter from “Its a Beautiful Life” could only dream of.
For many things, saying that “the market is self-correcting” is only true in the aggregate if at all. I think for most things important to individuals its rarely true. There are, right now, a few thousand individuals with large piles of your and my money gotten by being slicker than everyone else in a caveat emptor way with mortgages, across that value chain from origination to securitization. To say that over the past 5 years and the next 5 years the market will self-correct is fairly thin gruel.
And thus, most of us want some rules. Call it regulation if you will, call it Washington imposing its values on all the Libertarians if it makes you feel better. But I want some rules that may well slow things down… Sometimes that’s the best thing. Ask the residents in Louisiana.
DB: If it were anyone else commenting, I’d be inclined to say “you don’t get it.” But I know damn well that you “get it” and that you’re just choosing to ignore it. Would it make any sense to impose regulations on horse and buggy carriages? No. They’re irrelevant in today’s society. I’m stretching the analogy a bit here, but the concept is the same: In the “past”, when the supply and demand for credit was high, the regulations that were passed “today” might have helped to curb some of the excesses that caused problems.
But the supply and demand for credit “today” is NOT high. And needs to be higher to drive economic growth. But the Einsteins in Washington have seen fit to apply a set of rules to an environment that only exists in the past. And as a result: 1) can’t possibly fix what already happened, and 2) will only serve to exacerbate the weak economic condition we’re suffering through.
For those people who know what GSE (government-sponsored enterprise, e..g., Fannie Mae) stands for, the term isn’t generally held in very high regard.
Unfortunately, we’ve been saddled with a different kind of GSE, that is just as destructive.
It’s time to end the Great Socialist Experiment of 2010.
Good discussion. Unfortunately, once the laws are passed it’s very hard to reverse them. To Doug’s point, I’m ok with rules, but let’s start with making them a little easier to read/understand (e.g. Tax code) and enforce them when they are broken.