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Assume You Don't Have a Can Opener

Last week, I lamented the apparent death of the "plain vanilla" provision in the financial regulation package but noted that the policy "was never likely to do that much. The fact that a bank had to offer a basic card didn't mean they had to advertise it, or steer you toward it."

Stephen Waldman, who's sort of the Marilynne Robinson of financial blogging, offers up an argument to the contrary. "Rather than being anti-market," he writes, "vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market."

He's correct, of course. My comment was really about the politics: Before the provision was killed, it became clear that it would be grievously weakened (by the same forces and politicians who killed it, natch). If the banks had to offer simplified products but didn't have to label them clearly, or tell consumers about them, or explain them, and consumers had no real way of knowing why one product was cheaper than another, the provision wouldn't have made a great deal of difference.

But this is the inverse of the old joke about the stranded economist who finds a can of food and tells his distraught companions, "okay, assume a can opener." In politics, we often do the opposite: We assume we don't have a can opener, or more to the point, we assume we don't have a smoothly functioning Congress able to resist pressure from special interest groups. Under that set of assumptions, most policies don't work. But it's not the fault of the policies. It's the fault of the policymakers.

By Ezra Klein  |  September 29, 2009; 11:09 AM ET
Categories:  Financial Regulation  
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Comments

Market failure? Does she not realize this is an essentialy made up description for "market actions unbecoming to my exact taste, so let me meddle in them."

Posted by: nathanjfscott | September 29, 2009 11:59 AM | Report abuse

Market failure is a well known economic issue. If there is not adequate competition, information, etc. markets can be improved with regulation. The classic article on information is Akerlof's The Market for Lemons, which essentially won him the Nobel Prize.

Posted by: fuse | September 29, 2009 12:25 PM | Report abuse

nathanjfscott: who is "she"? The only she in the post is Marilynne Robinson, who is referenced only as an adjectival aside.

Ezra: Marilynne Robinson! You've so made my day by referencing her--she's my favorite writer. Dare I guess that you've read her essays as well as her fiction? The Death of Adam is quite phenomenal and Mother Country as well. If ever there was someone devoted to pursuing the truth as best as she possibly can, it's Robinson. But the question remains: what do you mean that Waldman is "the Marilynne Robinson of financial blogging"? I guess I'll have to start reading him to see.

Posted by: JonathanTE | September 29, 2009 12:28 PM | Report abuse

But "adequate" can be defined an infinite number of ways. And thus, any market can be called a "market failure." I agree, it's a commonly used, non-economic term for leftist to troll out whenever they want another regulation or agency, but it's completely subjective in every instance.

Posted by: nathanjfscott | September 29, 2009 12:29 PM | Report abuse

In the competition context in the US, adequate competition is defined in the first instance with mathematical precision (Herfindahl index). So your claim that "it's completely subjective in every instance" is wrong.

See Akerlof's paper for analysis regarding adequacy of information.

Posted by: fuse | September 29, 2009 12:41 PM | Report abuse

And market failure is a common subject of economics courses, textbooks, etc. Another classic example is externalities.

Posted by: fuse | September 29, 2009 12:43 PM | Report abuse

Even if the banks and etc. hide the plain vanilla products, I'd be willing to bet that periodicals like Consumer Reports, Kiplinger's, Money magazine and so on will find them and write side-by-side comparisons of the plain vanilla options. "Which basic credit card is right for you?" and that genre of magazine article.

Posted by: meander510 | September 29, 2009 1:11 PM | Report abuse

Writes extremely rarely. Blows everyone away when he publishes something.

Posted by: Ezra Klein | September 29, 2009 4:36 PM | Report abuse

I guess I should click the link, but I have no idea how a "plain vanilla" requirement would improve the market. How does one regulate the price of the plain vanilla product. If firms must issue plain vanilla products and are free to set the price, then they will make the price very high to make it appear that their fudge swirl with cream on top products are cheap.

There will be a price signal, but if it comes from the firms it will be a trick. Now if the federal government issued a plain vanilla credit card that would work, but that would be socialism and we can't ahve that.

Posted by: rjw88 | September 29, 2009 10:34 PM | Report abuse

Uhm I tried to click the link to get to Stephen Waldman but there doesn't seem to be one. In spite of the similarity of our nnames I can't find him

Robert Waldmann

Posted by: rjw88 | September 29, 2009 10:39 PM | Report abuse

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