It’s no surprise that the rollicking, seemingly never-ending debate over health care is taking up most of the news-media oxygen allotted to legislation. While the struggle to cover the uninsured is important, perhaps the biggest legislative battle is one that’s largely being fought behind the scenes. While it hasn’t garnered any addresses to joint sessions of Congress or any embarrassing outbursts by a South Carolina Congressman, the issue of financial regulatory reform can’t be overlooked.
Remember the finance industry? The one whose highly leveraged shenanigans brought the world economy to a standstill and caused the worst economic downturn since the Tigers had a Jewish first baseman (and inspired me to write some incredibly long and boring columns)? Well, after the finance industry struggled back to its feet with hundreds of billions of dollars of implicit and explicit government support, Tim Geithner and the Obama administration are now trying to regulate it.
Appropriately, the proposed regulations cover a wide range of activity. But since neither you nor my dear editors really want to read whether the Federal Reserve should be in charge of regulating systemic risk or if capital requirements should be increased, let’s focus on one specific proposed regulation: the Consumer Financial Protection Agency. Hell, let’s get even more specific, the now-dropped requirement that financial institutions offer “plain vanilla” products to consumers.
So did Tim Geithner and Barney Frank, the Massachusetts Democrat who’s chair of the House Financial Services Committee, remove a arduous government mandate that forces your local bank to offer a bean extract when you try to get money from the ATM? Not really.
Instead, the plain vanilla mandate was supposed to have required banks to offer some basic financial products: namely 30 year, fixed rate mortgages and low interest, minimal fee credit cards to consumers. So, why should you care about this obscure requirement?
Modern financial innovation is a tricky thing. In some ways, the explosion of new financial products following a deregulation process that started in the 1970s has been a boon to just about everyone. The 30 year mortgage and its variants allows more and more people to purchase homes. Credit cards offer convenience and allow consumers easy access to credit if they want to make a big purchase and “smooth” their consumption when their income varies or want to make investments.
But banks can’t make megabucks on these basic products. So, we saw a proliferation of mutated cousins of these sensible offerings: subprime mortgages, adjustable rate mortgages, teaser rates for credit cards, massive overdraft fees and the like. Instead of banks competing on the basis of the price and convenience of their products, they compete on their ability to best screw over customers and get them to start paying obscure and backbreaking fees.
The tragedy of the current financial services market is that it essentially is banks selling customers things they don’t want. If customers actually knew how bizarre and arduous their credit card terms were (in all fairness, progress has been made on this front) and were offered a plain vanilla alternative, I imagine they would insist on getting the latter option. In that world, banks would then be forced to compete on who could provide the best and cheapest service.
Perhaps Frank and Geithner, aware of the financial services industry’s fury at any regulation, figured that if they wanted any meaningful financial regulation to survive, they would have to offer up an Iphigenia. Maybe that’s the real problem: the industry that almost destroyed the world economy is now furiously obstructing even the most basic attempts to domesticate its behavior.