Financial Products Safety and choice

We have safety for our homes. We know our toaster will not burn down our house. Yes, likely we may have to pay more, but we at least know these things within a reasonable range. If we want, we can access some information about these things.

But, what about financial instruments?

Many people have raised the specter that if we regulate, if we try to ensure that your mortgage does not "burn down your house" or your credit cards do not utterly destroy you, we will stifle financial innovation.

However, Elizabeth Warren, who started this idea, tends to disagree.

If we do what she says though, credit card companies could not longer create great deals. If we do what she says, people would not be able to own a home with subprime mortgages.

To that she offers something about how innovative products can still occur. Essentially with the FDA regulating drugs, more actual companies wanted to invest. The idea too of creating an agency with the focus on consumer safety solely and granting power there also makes a great deal of sense and prevents the weird stovepiping (separating things out) we see now.

But, one thing I want to get to is the matter of choice. Right now you get a credit card. Warren wants information that you can read and understand. The industry says it is bad for innovation and bad for your choice. However, how does one choose when information is in very small font and very complex. I consider myself of somewhat average intelligence, and I struggle too.

Secondly, even if you do make it clear, without some other regulatory standards, things can fail. We often have a problem cognitively with discount rates. Again, I have the same problems myself. Things in the future that are probabilistic we do not have a great grasp on. After all, I hunt mammoths.

Finally, choice is always discussed of as an unbridled good. However, many of us would not choose a super risk product (well unless you are Larry Summers investing the Harvard endowment). Also, as many who know the Jam Study can respond, more choice actually paralyzes people. It is now considered a well-documented psychological phenomena.

What this boils down to is that a regulatory agency like this, as weird and for all the problems agencies can have, is likely necessary. Indeed too, limiting choice, may have a paradoxical effect of allowing us to actually choose.