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Barney Frank vs. the Government


The argument against the government's effort to force financial companies to offer some "plain vanilla" products is that it's direct government intrusion into the marketplace. "I remember the days when the bars had to serve food if they were going to serve liquor," said Barney Frank at Thursday's hearing, "and they served [the most] God awful food known to human beings, and I think you know trying to force someone to do good is a very, very qualitatively different, and I think often futile, effort, rather than preventing [someone] from doing bad."

True to his word, Frank looks to have killed the provision. Kevin Drum is frustrated.

(Plus there's this bonus: because banks are responsible for losses over $50, they've put a ton of time and energy into figuring out how to limit losses. They make sure their customers have fast and easy access to 800 numbers to report stolen cards. They have sophisticated transaction monitoring software and they call you proactively if they see spending patterns that suggest fraud. They have reward programs for merchants who confiscate cards. Etc. Do you think they would have done any of this if you were on the hook for bogus charges? Nope. Instead, they would have spent the past four decades claiming that stuff like this simply wasn't economically feasible and consumers needed to be more careful with their credit cards.)

The "plain vanilla" requirement would accomplish something the financial industry hates: it would make it easy for consumers to compare products. Even if you're planning to buy something non-vanilla, the price of the vanilla product provides a baseline that makes it easier to compare companies to each other and easier to see exactly how much you're paying (and what extra terms you're agreeing to) for the more complex products. That's good for consumers.

Tim Fernholz has a more sanguine take. But I'm with Drum on this one: Right now, we need to err on the side of reforming the financial sector and curbing what Felix Salmon calls its "lucrative opacity." If the regulations prove problematic, the dominant moneyed forces in American politics will be able to lift them. But if they prove insufficient, there will be no will to improve them absent another crisis.

Photo credit: AP Photo/J. Scott Applewhite.

By Ezra Klein  |  September 25, 2009; 10:43 AM ET
Categories:  Financial Regulation , Solutions  
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"If the regulations prove problematic, the dominant moneyed forces in American politics will be able to lift them."

Well, la de da.

Posted by: ostap666 | September 25, 2009 10:59 AM | Report abuse

I have two questions that I think illuminate the absurdity of Mr. Franks comment.

1. Why is Mr. Frank comparing requirements placed on corporations like Bank of America with those placed on a bunch of simple proprietorships.

2. Why does Mr. Frank make a comparison between mandating an increase in complexity (food must be included) to a mandate for less complexity (that's why it's called vanilla!).

Posted by: bcbulger | September 25, 2009 11:06 AM | Report abuse

Anyone who knows me knows I'm for all the socialism that is possible in America, but I really dont understand how legislating that banks sell specific products is really enforceable. Whats next forcing automakers to sell white cars because they're more energy efficient than black ones?

Posted by: zeppelin003 | September 25, 2009 11:36 AM | Report abuse

Dilbert author Scott Adams referred to companies that profit off of this sort of opaque scheming as "confusopolies."

Posted by: constans | September 25, 2009 11:37 AM | Report abuse

I can't agree with all of Frank's points; however, I do agree with his analogy.

Posted by: rmgregory | September 25, 2009 12:00 PM | Report abuse

Don't all of the institutions offer plain vanilla products anyway?

It seems that the regulation would only force them to make their offerings more transparent, which isn't really forcing them to do much.

Posted by: donhalljobs | September 25, 2009 12:37 PM | Report abuse

Intrusion into the holy Free Market? Please, perish the thought.

Next thing you know the US Treasury will be handing hundreds of billions to incompetently run and irresponsible financial companies, and the Fed will do it by printing trillions and handing them out via "special lending facilities" whose books will be kept secret.

Odd isn't it, how ideological purity in protecting the holy Free Market is only aroused when consumer protection is proposed.

Posted by: alex50 | September 25, 2009 1:50 PM | Report abuse

Frankly I'm with Frank

Probably for a different reason, since he isn't as ignorant as I am, but I would think that with a plain vanilly requirement, banks would offer plain vanilla products on terrible terrible terms. 30 year mortgage OK but the interest rate is 10% per year say.

To the extent that people use the plain vanilla product to judge the fudge swirl products, this will trick them into thinking that fudge swirl is great for their health. In fact, I'm amazed that bankers aren't already using that scam.

Now to be franker than Frank, I assume there is a back room deal in which the finance lobby agrees not to use extreme methods to fight other reforms so long as the plain vanilla is in the trash can. I mean the arguments made in public by politicians are justifications of decisions which are often made for other reasons.

Posted by: rjw88 | September 25, 2009 2:24 PM | Report abuse

rjw88: "the finance lobby agrees not to use extreme methods to fight other reforms so long as the plain vanilla is in the trash can"

If true that means that plain vanilla is what they most object to. Why? That's strong support for Felix Salmon's "lucrative opacity" argument.

rjw88: "I would think that with a plain vanilly requirement, banks would offer plain vanilla products on terrible terrible terms"

If all banks had to offer plain vanilla then it would make comparison shopping easy and they'd loose a lot of money doing that. Which is exactly why they object to it - they'd be forced to honestly compete with one another by offering products that financial non-experts could easily compare on the basis of price.

There is no reason that simple financial products that are sold by the millions, like credit cards and 30 year fixed mortgages, should be anything other than a commodity. If you're structuring a multi-billion dollar commercial real estate or corporate re-structuring deal it's one thing. It's safe to assume there are lawyers and financial experts on both sides, and that they're extravagant fees can be justified by the amount of money being discussed. But a home mortgage, let alone a credit card, doesn't justify that kind of expense on your part.

What the banks rely on is asymmetry. Since they sell millions of these products they can afford lawyers and financial experts to craft clever terms. Since you buy them one at a time, you can't.

As for Barney Frank, four of his five top campaign contributor industries would be affected by this (Securities & Investment, Real Estate, Insurance, and Commercial Banks). Together they contributed $778 thousand dollars in the 2008 election cycle alone.

Not that Barney Frank is worse than most other congressmen or senators in that respect (or the president for that matter). But do you really expect him to ignore that kind of money when his re-election depends on it?

Until this system of legalized bribery is abolished, expect no better from a government that's supposed to be representing its people rather than its campaign contributors.

Posted by: alex50 | September 25, 2009 3:54 PM | Report abuse

While I have no problem with the plain vanilla requirement, and am wholly sympathetic to the arguments that (a) if the banks don't want it it must be good for us and (b) no congressman (who depends on "legalized bribery" for re-election) can be trusted, I don't see a very good positive argument being made that the plain vanilla option will be effective. Since most of us have been reading/hearing a lot of Dan Ariely lately, let me just remind people that he points out a number of ways in which pricing strategies can reliably point people toward more expensive or profitable options.

He goes over a few examples in this TED talk:

or for a preview:

Just because the banks believe it's good for consumers doesn't necessarily make it so -- they could be wrong.

Posted by: Brian5 | September 25, 2009 4:45 PM | Report abuse

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