In her an opinion piece posted on The Huffington Post, "Real Change: Turning Up the Heat on Non-Bank Lenders", Professor Elizabeth Warren, Chair of the Congressional Oversight Panel, See http://www.huffingtonpost.com/elizabeth-warren/real-change-turning-up-th_b_276887.html, made an argument in support of a proposed consumer financial protection agency. I'm sorry but the professor is wrong. It's about revenue and wealth creation.
According to Professor Warren, such an agency will prove beneficial in reining in the bad behavior of non-bank lenders, the entities on which she lays some blame for the financial crisis. These are the entities that caused the financial crisis when they sold consumers dangerous financial products. "Non-bank institutions were active participants in the race to the bottom among lenders. Their fine-print contracts, and new tricks and traps, transformed the market", says Professor Warren.
Professor Warren goes on to say that failure on the part of the federal government to keep non-bank lenders, such as Countrywide, in check was due in part to the federal government punting the responsibility to the states because these non-bank institutions were small and located locally. Professor Warren points out that states have certain limitations that make their regulatory efforts ineffective. For example, the rates that states allow non-bank lenders to advertise obscure the true cost of capital leaving the consumer in the end to pay a higher interest rate. Professor Warren adds that state usury laws are easy to circumvent by the non-bank lender, and state legislatures are too slow to identify problems or change laws to address problems. Of course there is the classic resources problem, where due to budgetary and human resources constraints, states are unable to investigate and prosecute non-bank lenders for consumer credit law violations.
This proposal assumes that the market has failed to bring consumers and producers of financial services together. This assumption is wrong. The fact that non-bank lenders exist indicates that there was an opportunity to enter the financial services market and provide credit to a significant portion of these borrowers who could not obtain credit from traditional banks.
Second, Professor Warren's argument that there is no framework in place to address consumer protection in general and non-bank lenders specifically is faulty. The courts are always available for resolving disputes on consumer issues. They are the primary avenue for consumer protection, enforcement, and resolution of issues involving property and contract.
More importantly, however, is how proponents of additional consumer protection regulation quickly ignore the very disconnect between the problems that initiated the crisis, at least on the consumer end, and the solutions that they propose. The problem started when consumers started to default on their payments. The default led to reduced revenue streams that made the notes held by financial institutions around the globe less valuable.
Nothing that Professor Warren and other consumer protection proponents offer addresses that basic problem. Yes, there will always be consumers that will be overextended but for the majority that found themselves in dire circumstances that led to defaults, the primary culprit is an economy that has failed to reward workers with higher wages that offset higher costs of living and a consumer mentality that has failed to become proactive in the search for additional revenue streams.
In short, our lack of hustle has led to our inability to shore up enough capital stock to weather the downturns that put us at risk for default. The biggest mistake the Obama administration can make is to further embolden a consumer mentality that says its okay to spend more and not try to earn more. If the Obama administration really wants to help consumers, it should focus on identifying and promoting growth opportunities both here and abroad and training consumers to pursue those opportunities.
Comments
I think your understanding of the legal world is a bit facile.
Courts are not the primary avenues of consumer protection; that is not their purpose and it typically costs far more to sue than is at stake. Class action lawsuits are designed to address the problem, but someone must still finance them - typically for years - and the recoveries for individual plaintiffs are usually negligible.
The primary avenue for consumer redress is the state Attorney General's Office and, depending on the state, they can be more or less aggressive and pro-consumer. In any event, state AG's Offices do not act on behalf of individual consumers, so again you're dependent upon there being a similarly aggrieved class and, as with the courts, you still need a valid legal cause of action to go on.
Unfortunately, the individual consumer is at a severe disadvantage resource-wise to protect himself forensically, so the best avenue for consumer protection is regulation designed to deter and prevent abuses.
Your assessment of how "the problem" started is off-base as well. Toxic mortgages and other consumer loan products are structured and packaged to mislead consumers and encourage them to overextend themselves. The financial crisis started when housing became severely overvalued as consumers paid more than they could afford. When their interest rates soared, the overheated housing market dropped and they could not refinance, they fell into default. Also, it is estimated that most of the foreclosures that will occur over the next year or so will be "strategic defaults;" the borrower can afford to pay but chooses to default because the house is worth less than is owed.
You are right that our economy has failed to reward workers with higher wages to offset higher costs - this is the primary mechanism by which wealth has become increasingly (and dangerously) overconcentrated, and deceptively cheap consumer credit has been its primary enabler.
I think your understanding of the legal world is a bit facile.
Courts are not the primary avenues of consumer protection; that is not their purpose and it typically costs far more to sue than is at stake. Class action lawsuits are designed to address the problem, but someone must still finance them - typically for years - and the recoveries for individual plaintiffs are usually negligible.
The primary avenue for consumer redress is the state Attorney General's Office and, depending on the state, they can be more or less aggressive and pro-consumer. In any event, state AG's Offices do not act on behalf of individual consumers, so again you're dependent upon there being a similarly aggrieved class and, as with the courts, you still need a valid legal cause of action to go on.
Unfortunately, the individual consumer is at a severe disadvantage resource-wise to protect himself forensically, so the best avenue for consumer protection is regulation designed to deter and prevent abuses.
Among your incorrect arguments against Elizabeth Warren you state "The courts are always available for resolving disputes on consumer issues. They are the primary avenue for consumer protection, enforcement, and resolution of issues involving property and contract." but this is absolutely inaccurate, because for several years now, it has become common policy with the lending industry to circumvent the courts, and use binding Arbitration in disputes between consumers and credit firms, and they buried it deep in there credit card contracts. PROOF: Source: DLA Piper - Against a backdrop of increasing Congressional scrutiny of arbitral fairness and proposed federal legislation that would prohibit pre-dispute arbitral agreements in consumer, employment, franchise and civil rights disputes in the US, both the National Arbitration Forum and the American Arbitration Association have ceased administering consumer debt collection arbitrations."
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