Wednesday, November 18, 2009

Finance Reform And Consumer Protection

I'm for some financial reform, but the consumer protection aspect concerns me. Not that I'm in favor of consumers getting screwed, but that the idea for the financial consumer protection agency was largely started with a Harvard Business Review article written by Amelia Tyagi who I have decided uses an entirely different and patently inferior logic and reason than I do.

She was on NPR's Marketplace the other night and I was so distracted by the logic used that I almost crashed my car. Here are some samples:
And then the industry was deregulated, and all bets were off. No longer did banks make their profits from reasonably priced loans to people who were able to pay. Instead, pre-approved credit card offers flooded the mailbox of every man, woman, and child. Opening a checking account became free, while bounced check fees skyrocketed.

Wait. So, people get checking accounts for free as long as they don't write checks for money they don't have, and this is a problem? People paying for checking accounts, but being able to write checks for more money than they actually is what we want? Do the correct thing = free. Do the stupid or wrong thing = cost. This is bad? Sounds like good incentives to me. Hey, I've overdrafted before and the fees do suck, but, shockingly, I didn't find this some huge injustice imposed upon me by an evil bank. It was a stupid mistake on my part.

She continues:
For most banks the real profits now come from late fees, balloon payments, default interest rates, and a host of other tricks and traps. In other words, making a profit has become an exercise in misdirection and misinformation. Sneaky has become the norm.

And later:
But is an over-the-limit fee really an innovation, or just a cheap trick designed to fool customers into believing a product costs one price when the majority of customers actually pay far more?

Apparently, the word "sneaky" means two entirely different things to me and Amelia Tyagi. The credit card company tells me the day I have to pay every month on the bill they send me. It's pretty consistent actually. And they send me letters when they change my credit limit. As long as I do those things, well, default interest rates, late fees, and over-the-limit fees don't apply.

I'm uncomfortable with some aspect of the credit card and banking industry. I don't like them raising rates when somebody's late on another account and some of the ways they calculate interest concern me. I find the pre-approved offers annoying, but not unscrupulous.

Offering free checking while charging overdraft fees doesn't seem like some dastardly trick. Charging people who don't pay on-time higher interest rates seems entirely prudent. The alternative is that we go back to paying for checking accounts so that the inattentive or stupid can have less consequences for their inattentiveness and stupidity. That's certainly not progress and is the primary reason why I am skeptical of the finance consumer protection agency.


The Ancient said...

FLG --

Here's a Rorschach test for you:

What do you think of his complaint?

(Bear in mind he's old, has made all the money he's ever going to make, and being not rich, is justifiably risk-averse.)

FLG said...

I'd say he can get another 70 basis points if he went to INGDirect. Also, a prudent saver would ladder their CDs so that sinterest rate fluctuations are mitigated to some extent.

Also, he's focusing on the nominal interest rate, not the real one. We haven't seen much inflation. I'm not entirely sure, but I think he's getting a real return. (I didn't check CPI today, but I'll assume no surprises.)

I just looked up the 1 year Libor and it's 1.09. So, the bank probably doesn't have a huge spread on its loans.

Yeah, I'm gonna say, ceteris paribus, that his complaint is without much merit. But, on the other hand, it's understandable. It doesn't disgust me the way that the NPR contributor did.

His argument about inflating another asset bubble with cheap money is something that I do worry about though.

What's your take on his complaint?

The Ancient said...

I have two principal reactions --

It's very odd of him to act as if this is something new. (Given his background -- Editor of the Des Moines News, reporter for the WSJ, etc. -- he should know better.) The same situation obtained in 1992: More than 2000 banks were underwater, including Citibank. There was much publicity about this. Greenspan's response was a) to hold a press conference and assert the contrary, and b) increase spreads so that most of those 2000 banks were temporarily bailed out. And who paid the price, then as always? Small savers. They suffered so that others (bankers and their shareholders) might live -- at least for a time. They're an attractive victim, from a public policy standpoint, because they're relatively powerless and their losses are, on an individual level, difficult to quantify.

At the same time, I really can't imagine an intelligent person not on his deathbed with ten dollars to his name buying a CD. That level of risk aversion strikes me as ridiculous.

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