Innovation for Consumers' Sake
Rep. Brad Miller has a great piece today about what financial innovation has brought about and how to regulate the bankers so their innovation helps rather than hurts society. And he's looking for some grassroots help in promoting his latest bill to rein in the financial sector so it stops preying on people. Here's how he described the problem in November 2007.
But what on earth do we mean when we say that a mortgage is innovative? It means, simply, Mr. Speaker, that there is no end to the variety of terms, there is a proliferation of indecipherable terms that are not designed to help consumers.
Alan Greenspan called them "exotic loans." Others have called them "toxic loans." The innovation is not really about allowing consumers to tailor narrowly the loan they get to their specific circumstances. The late Ned Gramlich, a well regarded former Federal Reserve Board Governor asked why was it that the riskiest loans were being sold to the least sophisticated consumers? It was a rhetorical question, Mr. Speaker. He knew the answer. He knew those loans were being sold to people to take advantage of them, to separate from middle class homeowners more and more in equity in their home, to trap them in a cycle of having to borrow and borrow again, every time they borrowed losing more of the equity in their homes.
He explains his proposal here:
One way to make banks boring is with boring regulations. Property and casualty insurance is all pretty boring. In most states, P&C insurers have to file policy forms with regulators. The regulator makes sure there isn't too much information asymmetry between insurer and customer. And insurers have to report to the government on their actuarial projections, sales and profit figures, and claims experience.
I’m sure banks will say such regulation would stifle great innovations like subprime mortgages and credit card fees.
Property and casualty insurers don’t often become billionaires. They aren’t Masters of the Universe. But when’s the last time you heard a P&C policy called a “toxic asset”?
It might be a good time to call Washington again and let them know we support Brad's bill.