Felix Salmon sent me a note in response to my last post. He's more optimistic that the new regulations will kill fewer trees and result in clearer and more focused information for the consumer. Maybe so. I do believe it would be possible to provide a better, more streamlined set of disclosure documents to the consumer. I'm not sure it will happen.
It may very well kill fewer trees though. One of the possibilities mentioned in the white paper is the use of Internet based calculators (see page 63) to help consumers understand what they are getting.
I've purchased two houses and two cars in my lifetime, and I understood exactly what I was getting. And in each case, there was someone pushing the papers who was ready to explain each part. Of course in each case, I made it clear that I understood, so there was no way that they were going to lead me astray. Could a dishonest person have tried to lead me astray? They could have. And if I were not financially literate, they might have succeeded.
So there are (at least) two ways for the borrower to mess himself or herself up here. The borrower may not be financially literate and be led astray by a dishonest agent. Or the borrower might be financially literate and just get caught up in the madness.
Tell me how an Internet calculator is going to really protect either of these folks with any more certainty that the current system does? A fast talking salesperson can figure out how to maneuver around the disclosure requirements anyway (just you watch). And nothing is going to stop the financially literate individual who is just following the herd figuring it won't happen to him or her.
But I do think that financial literacy is a necessary condition to better consumer protection. And that isn't coming from an Internet calculator. (By the way there is paragraph mentioning financial literacy in the white paper. But I've seen that sort of talk for years. Talk is cheap.)
We're rearranging the deck chairs, folks.
One of the complaints about the Vista operating system is that it assumes the user is an idiot and asks you to confirm everything. (There is a way to turn that off, however.) I have a feeling that the new model for consumer protection in the financial markets will be similar--but without the ability to turn it off. The worst case scenario would be that anyone who wants a loan will have to go through something like one of those web based corporate training programs that forces you to click through bunch of information, answer some true/false questions, and give you a certificate of completion. Don't say I didn't warn you.
Lest I be seen as being too harsh, let me conclude by saying that the aim here is noble. I am sure that they have the very best intentions in the world. I'm also quite sure that they believe that what they are proposing will benefit the consumer. They want to give the consumer more useful knowledge, and they think that they'll get it right this time where they failed before. I say it's not that easy. And all the Internet calculators in the world are a waste of time for that guy who just clicks through the information without really reading it. How are you going to regulate that?
In the case of Vista, I'm sure that so many people just click "ok" when prompted for all those confirmations that they don't read them anymore. It ends up being less effective that way. I don't think that's what we want credit market regulation to look like.
It may very well kill fewer trees though. One of the possibilities mentioned in the white paper is the use of Internet based calculators (see page 63) to help consumers understand what they are getting.
I've purchased two houses and two cars in my lifetime, and I understood exactly what I was getting. And in each case, there was someone pushing the papers who was ready to explain each part. Of course in each case, I made it clear that I understood, so there was no way that they were going to lead me astray. Could a dishonest person have tried to lead me astray? They could have. And if I were not financially literate, they might have succeeded.
So there are (at least) two ways for the borrower to mess himself or herself up here. The borrower may not be financially literate and be led astray by a dishonest agent. Or the borrower might be financially literate and just get caught up in the madness.
Tell me how an Internet calculator is going to really protect either of these folks with any more certainty that the current system does? A fast talking salesperson can figure out how to maneuver around the disclosure requirements anyway (just you watch). And nothing is going to stop the financially literate individual who is just following the herd figuring it won't happen to him or her.
But I do think that financial literacy is a necessary condition to better consumer protection. And that isn't coming from an Internet calculator. (By the way there is paragraph mentioning financial literacy in the white paper. But I've seen that sort of talk for years. Talk is cheap.)
We're rearranging the deck chairs, folks.
One of the complaints about the Vista operating system is that it assumes the user is an idiot and asks you to confirm everything. (There is a way to turn that off, however.) I have a feeling that the new model for consumer protection in the financial markets will be similar--but without the ability to turn it off. The worst case scenario would be that anyone who wants a loan will have to go through something like one of those web based corporate training programs that forces you to click through bunch of information, answer some true/false questions, and give you a certificate of completion. Don't say I didn't warn you.
Lest I be seen as being too harsh, let me conclude by saying that the aim here is noble. I am sure that they have the very best intentions in the world. I'm also quite sure that they believe that what they are proposing will benefit the consumer. They want to give the consumer more useful knowledge, and they think that they'll get it right this time where they failed before. I say it's not that easy. And all the Internet calculators in the world are a waste of time for that guy who just clicks through the information without really reading it. How are you going to regulate that?
In the case of Vista, I'm sure that so many people just click "ok" when prompted for all those confirmations that they don't read them anymore. It ends up being less effective that way. I don't think that's what we want credit market regulation to look like.
The Share Economy of Weitzman (http://en.wikipedia.org/wiki/Martin_Weitzman and The share economy : conquering stagflation / Martin L. Weitzman.
Publisher:Cambridge, Mass : Harvard University Press, 1984
ISBN:0674805828)
can be extended. One's mortgage is
a percentage of one's income. That is, one goes to get a mortgage
or get a loan from the credit card company and gets so much money
in exchange for sharing a certain percentage of their income.
To show one's financial stability, one doesn't give a down payment,
one saves up enough money and invests it so that twenty percent
of one's income comes from investments and not working. That provides some protection for the investor if the borrower becomes
unemployed, decides to take up a low-pay satisfying job or
religious vocation, or becomes disabled.
Its simple as a percentage--no disclosure, calculators or complicated rules necessary.
One's income is a percentage of the
firm (or government if you are fortunate to have a government job)'s
gross revenue.
And it works for companies as well--instead of issuing debt, they
share a percentage of their revenues. That way should revenue
go down, they don't go bankrupt--their debts and wage expense
goes down proportionally.
And to the extent that wages and other income go up or down with inflation or deflation, ones payments are indexed to same.
I talk about this in (http://uthreee.blogspot.com/2009/05/share-economy-reduction-ad-absurdum-or.html) four articles
on my (A href="http://uthreee.blogspot.com/) Participatory Democracy Blog
The "mortgages" can be combined into groups for those who wish
to diversify. But if one just invested in one or two loans each
year, one would quickly get a reasonable divirsification.
One needs only twelve to eighteen stocks (see http://news.morningstar.com/classroom2/course.asp?docId=145385&page=4&CN=COM) to eliminate
"nonsystemic risk." I assume that if an individual investor
helped loan to eighteen individuals, they would have enough
diversification in case some became disabled, unemployed, etc.
One can learn about twelve people in a reasonably short period of time
(review their earnings history, their employment record, read
recommendations, etc.)