Wednesday, March 10, 2010

The Consumer Protection Agency

I had heard about this, and hadn't really thought much about it. I guess if I had any reactions to the idea, they were probably positive. Elizabeth Warren seemed likable and well-meaning, and if she's pushing for it, why not?

Then I started watching this video of her on Charlie Rose, and I started thinking "Oh, it's another regulatory agency." One person's "protections" are another person's "regulations."

I'm not exactly sure what this agency would "protect" or "regulate," but the example Elizabeth Warren used was credit card contracts. The problem is they're too long. Well, I think most people would agree with that, but how do we get the change most people want?

I think we can see how other "regulatory" agencies have worked in the past. Look at the SEC who let Bernie Madoff continue his Ponzi scheme for years despite warnings. Look at the FDA whose 'Food Safety Czar' is a former Monsanto chief lobbyist. Government regulatory agencies have a funny habit of becoming "captured."

The solution isn't government regulation, but free market regulation. Only the free market can determine what businesses deserve to succeed or fail. Some people may say that we have free market regulation now and that it hasn't worked, but no, we do not have a free market in just about any sector of the economy.

Let's just take a look at two different time periods to see how government intervention affects the economy in general. In 1920, industrial production fell 25%. Unemployment increased nearly nine fold. Yet the government did not intervene much, and the economy was in recovery beginning in 1922.

Compare this to 1930, when industrial production had only fallen 12% from its 1929 peak, but because of government intervention such as the Smoot-Hawley tariff and the National Industrial Recovery Act, the country spiraled into the Great Depression. No American depression had ever lasted so long.

Even today, government "regulations" are ever-present in virtually every industry. Between 2001 and 2009, there were 159 "economically significant" new regulations created. "Economically significant" means that they cost the economy $100M or more. The regulation ranged from boosting fuel economy standards for light trucks to continuing a ban on bringing torch lighters into airplane cabins. In 2009, $42.7B was spent just on "regulatory activities," meaning issuing and enforcing regulations.

How does the government intervene in the credit card market? Well, the most obvious way is through the Fed setting the federal funds rate (even though the Fed is nominally a "quasi-governmental" agency.)

The Fed allows Chase, BoA, and Citi, who collectively control over half of the nation's outstanding credit card debt, to borrow for money .25%. That's not a market rate. It's a rate that's created by the Federal Reserve. Anyone who wants to borrow at the same rate has to go through the hoops of chartering a bank.

The solution to "consumer protection" is to get rid of government-caused distortions in the market in order to allow competition, not to create new "regulators."


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