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Freud, the Consumer Finance Protection Agency and Madoff

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The Obama Administration has just submitted to Congress a 150-page proposal for the establishment of a Consumer Finance Protection Agency. As expected, banks and financial companies of all types are in strong opposition.

The intent of this agency is to centralize the oversight and regulation of financial products offered to consumers - mortgages and credit cards being the big two. As one who has studied both of these products for many years, I should have a strong feeling about whether increased government regulation is necessary yet somehow I'm just not sure.

As Freud has said, "the mind is an arena for the struggle of antagonistic impulses" and so a la Freud, here are my competing thoughts:

FOR a Consumer Finance Protection Agency:

1. In the last ten years, banks and financial services companies, pushing for increased profits, completely lost sight of treating people fairly. Mortgage and credit card documentation is difficult to understand - deliberately so.

2. Humans are human. If you give us too much rope, we will in fact hang ourselves.

3. If you've ever run anything, you know that whenever there are too many people (government agencies) responsible for the same objective, no one gets it done. In the company I run whenever I want to know why Bill didn't get something done, he suggests it was Mary's job who thought it was Jane's job and so on. Just substitute different government agencies for Bill, Mary and Jane.

AGAINST
a Consumer Finance Protection Agency:

1. Whenever there is government regulation, the fear of enforcement keeps innovation in check. Today, in hindsight, everyone hates the mortgage products that were created earlier this decade allowing people to buy housing with low down payments. However, had housing prices continued to increase, people would be lauding these creative products for opening the housing market to lots of low-income and first-time buyers.

2. The government does not simplify - it complicates (witness the 150 pages of authorizing legislation). A confused mind (consumer) is a close cousin to an uninformed mind. Who here understands the Internal Revenue Code?

3. People need to take responsibility for their own actions. Although the banks and finance companies should have done a better job making documentation and business practices more consumer-friendly, the truth is that as to mortgages and credit cards, there are only a half dozen or so basic points consumers need to understand. This stuff is not rocket science. There is a side of me that would much rather see our country put increased resources and energy behind financial education (especially for young adults) rather than more regulation.

MADOFF
: How does all this tie in with Madoff? Here, too, I disclose the competing thoughts in my mind when I hear the stories of people who lost their life savings investing with him. On the one hand my heart is broken for these people. On the other hand when I hear calls for the government (translation: you and me) to cover their losses, I wonder whether these people should be made whole in light of the fact that they violated every basic rule of investing: a) diversify, b) only invest in what you understand, c) when the reward is out of line with competing products, there must be risk, and d) the stock market can never produce constant, predictable returns.

What are my conclusions? Not sure ... just using this post to disclose "antagonistic impulses."


Jim Randel
is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, was just awarded the Gold Medal in the Robert Bruss Book Competition - sponsored by NAREE - an association of 650 journalists and professionals