A Financial Services Safety Commission could aid consumers.
Interest-only, adjustable-rate mortgages sold to subprime borrowers are the financial equivalent of lead-painted toys. But while the Consumer Products Safety Commission (CPSC) regularly issues recalls of dangerous or defective products, when it comes to increasingly complex financial products, consumers are left to fend for themselves.
The financial services industry has brought us an array of innovative products that have enabled consumers to finance everything from the necessary to the frivolous, and the economy has benefitted from much of that innovation. Without the creativity of the financial sector, college educations would be out of reach for many, we likely would not have purchased 16.5 million automobiles last year, and pay-at-the-pump gasoline stations would be pure fantasy.
Other financial services innovations, however, have millions of consumers paying exorbitant credit card interest, fees and other charges; others trapped in outlandish payday-loan schemes and, of course, hundreds of thousands in mortgages they cannot afford, a problem that has grown so large as to threaten the country's economic growth.
A new Minnesota law provides greater mortgage protection for consumers, and Congress is considering other proposals to deal with the subprime mess. It may be time for the financial services equivalent of the CPSC, as suggested by Harvard law professor Elizabeth Warren. We need the financial services sector to continue to innovate, but we also need to give consumers the tools to navigate these increasingly complex and potentially hazardous matters without degrees in law and accounting. As the mortgage crisis demonstrates, it's not just the borrowers and lenders who get hurt.
Regulation, of course, is not always the answer. Government inefficiency and too much interference can jeopardize a healthy marketplace. But you'd be hard pressed to make the case that the CPSC has dampened sales of consumer products.
In fact, one could argue that because the government sets a baseline of safety, consumers are more confident in the products they buy and, thus, more likely to buy more of them. As consumer products became more complex, these assurances become even more necessary.
It's unreasonable to expect any consumer to understand all the possible ways that a device might pose a hazard. It's no less true with financial products. Those who would oppose more oversight than what's already provided by state and federal trade, commerce and banking regulators also make the buyer-beware argument.
But, again, the experience with consumer products has shown that the market operates better with some modicum of oversight. And, lately, it really has been a modicum. The CPSC has a budget of $62 million and employs 420 people, down 11 percent from 2005, and next year's budget calls for another 5 percent cut in staff.
The current mortgage crisis dominates the headlines now, but without a structure to prevent future follies, the dynamics of an unfettered marketplace almost assures another. Estimates of the losses to financial firms and investors from the mortgage crisis range from a quarter to half a trillion dollars, and that does not include the toll on the families involved. Even a marginally effective Financial Services Safety Commission would pay back its costs fifty-fold.