MFG 2.0

Consumer Products Safety Commission For Financial Products

Just heard of an intriguing idea from Elizabeth Warren, head of the TARP oversight committee, Harvard professor and bankruptcy expert.

She has proposed that the financial world be regulated in a similar fashion to the manufacturing world as far as product safety is concerned. In this environment of toxic financial products and crumbling Ponzi schemes, it sounds eminently reasonable:

It is difficult to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street and the mortgage won't even carry a disclosure of that fact to the homeowner.

Similarly, it's impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

In this surprisingly long op-ed, Warren points to many problems in the financial world, including a "planned incomprehensibility" as a fundamental strategy of the modern financial world:

How did financial products get so dangerous? Part of the problem is that disclosure has become a way to obfuscate rather than to inform. According to The Wall Street Journal, in the early 1980s, the typical credit card contract was a page long; by the early 2000s, that contract had grown to more than 30 pages of incomprehensible text.

...and notes that the financial "industry" is taking massive amounts of capital out of the economy, effectively bleeding money out of other, more productive uses:

In 2006, for example, Americans turned over $89 billion in fees, interest payments and other charges associated with their credit cards. Debt repayment has become a growing part of the American family budget, so much so that the typical family with credit card debt now spends only slightly less on fees and interest each year than it does on clothing, shoes, laundry and dry cleaning.

There are a lot of great lines in the piece; this is one of them:

Creating safer marketplaces is not about protecting consumers from all possible bad decisions. It is about making certain the products themselves don't become the source of the trouble.

Sadly, this editorial ran a few years ago, and the idea obviously wasn't heeded.

TAGS: Innovation
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