Why Elizabeth Warren is an Inspired Choice to Oversee TARP

Tom Brown has a peculiar column today taking issue with the inspired choice of Elizabeth Warren to chair the panel overseeing the TARP program. The problem, in his eyes, is that Warren is a fighter for consumers, rather than banks. Brown reckons she’s absolutely wrong when she says that banks attempt to pry every dollar possible out of consumers, fairly or otherwise:

Warren’s view of the consumer finance industry, and the “tricks” at lenders’ disposal, happens to be 100% wrong. If consumer lenders really did have the fearsome advantage over their customers Warren imagines, how is it that the entire subprime mortgage industry has gone out of business over the past 18 months? Or that most monoline card lenders have either gone belly up or have been forced to seek buyers? Here’s why: consumer lending is a tough, competitive business. Lenders don’t have proprietary, unfair tricks. They all get competed away.

Tom Brown should, frankly, get out more. For many years, lenders have made an ever-increasing proportion of their revenues from fees, penalties, and interest rates which spike up for any or no reason. The lenders have every incentive to maximize those fees, to the detriment of their customers, even when they bear no relation to the actual costs involved.

Remember, for instance, the fixed $78.10 cost of wiring money from a dollar bank account in Ireland to a dollar bank account in New York. All but $20 of that went straight to banks, whose aggregate actual costs were to all intents and purposes zero. Funny how those fees haven’t been "competed away" — or any of the other fees which mean that the overwhleming majority of Americans end up paying large sums for the privilege of lending their money interest-free to the bank.

Yes, consumer lending is tough and competitive. But that’s precisely why there are so many hidden fees. If the fees were obvious and up-front, no one would choose to bank at that institution, even if they totaled a fraction of what other banks charged. And so the banks get increasingly devious and unpopular.

In normal times, there’s very little that we the people can do about this, but these aren’t normal times: in fact, the tables have now, deliciously, been turned. It is we who are now setting the terms; it is the banks who are being forced to accept them. The taxpayers who are coming up with $700 billion to save the banks are exactly the same people who have been systematically squeezed by the banking system for years, and it’s only just that they should try to put an end to unfair and underhand practices.

Says Brown, on Warren:

She cares less about seeing that the TARP money helps end the financial crisis, I suspect, than she does about finding ways to bind the industry in a straitjacket of new “consumer-friendly” regulation. Unfortunately, those new regulations would almost certainly have the effect of slowing the supply of credit–the opposite of what the TARP plan is supposed to achieve.

There’s no reason why "consumer-friendly" should be in scare quotes there: the term means exactly what it says. Excess lending to consumers is not consumer-friendly, even when it results in lenders going out of business. Banking isn’t a zero-sum game, not when it’s played the way it has been over the past few years. If I take out a $500,000 loan to buy a house I can’t afford, and then I fail to pay it back, both I and the lender lose.

Honest lenders have nothing to fear from simple consumer protection. All that Warren is asking is that their fees be up-front and clear, rather than buried in small print — so that consumers know exactly what they’re getting themselves in for. There’s no reason this should slow the supply of credit at all, especially considering that it should have the happy consequence of lowering default rates and increasing the quality of the asset side of banks’ balance sheets. Which would also help to minimize the chances that we’ll have to have another bank bailout.

After all, the constraints on lending, right now, are on the supply side, with the banks: there’s no shortage of demand for new loans. The banks should know now, if they didn’t before, that treating loans as a loss leader, with the real profits to be made in hidden fees and other underhand tactics, is not a good long-term strategy: it weakens the quality of your loan book too much. And credit is so tight right now that banks don’t need to advertise low loan rates in order to get customers.

So let’s take this opportunity to get truth in lending, and put an end to the practices that Elizabeth Warren has been railing against. If we do it well, everybody will end up a winner.

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