Vanilla is a commodity

Do we have no fight left in us at all? Mike Konczal and Kevin Drum are excellent as always, but must we really write eulogies? Is one of the best regulatory proposals so far dead just because a single well-bought congressman says so?

Extracting the vanilla from the CFPA is not, as Felix Salmon put it “the beginning of the end of meaningful regulatory reform”. It is the end of the end. Vanilla products were the only part of the CFPA proposal that was likely to stay effective for more than a brief period, that would be resistant to the games banks play. All the rest will be subject to off-news-cycle negotiation and evasion, the usual lion-and-mouse game where regulators are the rodents but it’s the rest of us that get swallowed.

Wall Street’s favorite comedian-politician, Barney Frank, was very savvy in framing the debate over the issue with his well-placed mischaracterization of vanilla products as “anti-market”. That is bass-ackwards. The vanilla option is pro-market, because it is procompetitive. Of course, that is precisely why banks hate it: Vanilla products would turn basic financial services into a commodity business, and force providers to compete on price.

Ezra Klein is suitably depressed, but he’s wrong when he writes that “the ‘plain vanilla’ provision was never likely to do that much.” Vanilla products would be very popular, which is why they are so threatening. Financial services are an area where markets not only fail due to informational problems, but where participants are very aware of that failure. Consumers know they are at a disadvantage when transacting with banks, and do not believe that reputational constraints or internal controls offer sufficient guarantee of fair-dealing. Status quo financial services should be a classic “lemons” problem, a no-trade equilibrium. Unfortunately, those models of no-trade equilibria don’t take into account that people sometimes really need the products they cannot intelligently buy, and so tolerate large rent extractions if they must in order to transact.

The price of assuring that one is not taken advantage of by financial service providers is not participating in the modern economy. You cannot have a job, because payments are by check or direct deposit. You cannot buy a home or a car, because for the vast majority, those purchases require financing. Try travelling with only cash for plane tickets, hotel rooms, and car rentals. People will “voluntarily” participate in markets rigged against them for the privilege of being normal. And we do, every day.

But define a reliable vanilla option, and the dynamic flips on its head. Instead of tolerating rent-extraction as a cost of participation, consumers put up with one-size-fits-all products in exchange for peace of mind. Most consumers benefit very little from exotic product features, and I suspect that many are made deeply nervous by the complex contracts they can neither negotiate nor understand, but nevertheless must sign. Vanilla financial products would be extensively vetted and and their characteristics would soon become widely known. Inevitable malfunctions would be loudly discussed in the halls of Congress, rather than hushed-up in rigged private arbitrations. Vanilla products would face discipline both from private markets (no one is suggesting we forbid other flavors) and from a very public political process. Politics and markets are both deeply flawed, but they are flawed in different ways, and we should take advantage of that. In Arnold Kling’s lexicon, a market in which vanilla and exotic financial products coexist and compete offers the benefits both of exit and of voice. [Update: Chris Mealy notes in the comments that these terms are due to Albert Hirschman]

Rather than being anti-market, vanilla financial products would help correct very clear market failures that arise from imperfect information and high search costs. It is the status quo that is anti-market.

I’m sympathetic to the principled libertarian objection to having the government require that private parties offer a product they otherwise might not. No one should be forced to offer vanilla financial products. Small-enough-to-fail boutiques should be free to offer only the products they wish. However, if an institution wishes to avail itself of government-provided deposit insurance or to access Fed borrowing facilities, it is perfectly legitimate for the government to set requirements. The government can choose not to offer its safety net to institutions that don’t offer vanilla products, just as banks currently choose not to offer me a credit card unless I sign up to binding arbitration and unilateral contract changes. I fail to see why one is coercive and the other not. (The government has no monopoly on deposit insurance. Private insurers are free to provide similar insurance, and do so for many financial service companies already.)

An Economist anonobloggeer has some peculiar non-compliments about the vanilla products proposal:

The vanilla offering seems to be intended to substitute for sophistication or research on the part of the customer, but I’m just not sure that’s a good way to approach the issue. As best I can tell, the vanilla plan wouldn’t mandate the price of the simple option; just because a bank would have to offer a vanilla mortgage loan doesn’t mean it would have to offer a competitive vanilla mortgage loan. If that’s the case, banks could easily use high rates on the simple products to steer individuals toward the complex offerings. Or, the vanilla rule could actually serve to direct bank collusion toward high-priced, high-margin products.

Just because a commodity exchange standardizes the quality of corn that must be delivered into a futures contract doesn’t mean that any seller has to offer corn at a good price. So true! But sellers that offer commodities at above market prices don’t usually find buyers. Since vanilla financial products would be commodities, banks would have to universally collude to offer them at inflated prices in order to bilk consumers. Competing vanilla project offerings would (at least they should) vary only on a single dimension (e.g. an interest rate). Points, fees, penalties, etc. would be homogeneous or uniformly pegged to the core price. Banks are very, very good at forming tacit cartels, but colluding on complicated terms and conditions is easier and less likely to attract the antitrust authorities than fixing a headline price.

More from the econoanonoblogger:

To me it seems like the more effective solution would be to require that financial institutions explain, in detail, each and every fee they are assessing (or might potentially assess) to customers. That would inform consumers of what’s going on in the monthly bill, and it would create an incentive to reduce the number and complexity of fees, as lengthy explanations would be a hassle for all involved and would reduce business.

One of the great errors in modern policy is to confuse disclosure with information. It is not the case, currently, that banks secretly take your money without itemizing the charge on some statement. (Sometimes when they take your money they call it “service fee” or something equally nondescriptive, and it’d be nice if that practice went away.) Rather, banks intentionally define contracts in such a way that the cost to many customers of understanding and competitively shopping all the dimensions of the product seems higher than the cost of terminating the search and signing the dotted line. More detailed disclosure doesn’t eliminate, and can sometimes exacerbate, the real information costs customers face, which derive from the complexity of the required analysis and lack of information about alternatives, not from an absence of product data. Of that we all have pages, with more arriving every month. You might think there’d be a market for ostentatious simplicity, and there might be. But no bank’s lawyers would sign off on a single page, 12 point text, no-extratextual-incorporation-or-unilateral-modification contract. When routine contracts get more complex than that, it’s just gibberish competing with gibberish for people who have lives. Some financial products are necessarily complex. But one way of managing complexity is standardization. It may be worth it for consumers to carefully study the one contract they will probably sign in a way that it would not be worth poring through 100 freeform contracts, 99 of which they will never sign.

The most serious objection I know to vanilla financial products is that they would be harmful precisely because they would catastrophically succeed. The theory is that nothing is more dangerous than a commodified bank, and the evidence is May Day, 1975, when the SEC ended fixed stock trading fees in the brokerage industry. Some commentators (e.g. Barry Eichengreen) claim that by eliminating a stable, cushy profit center, the May Day deregulation forced gentle investment banks to become hungry innovators, that the financial system has grown progressively less stable because under cut-throat competition risk-takers dominate (until they self-destruct and take the rest of us down with ‘em). I don’t buy the May Day story, but for the sake of argument, let’s suppose it’s true. Let’s suppose that, in the name of stability, the best policy would be to ensure banks easy profits so that they needn’t dabble in dangerous things. Then two conclusions follow:

  1. If we are going to strike a policy bargain whereunder banks get a nice sinecure in exchange for a promise of stodgy mellowness, it seems reasonable that they should commit to the stodgy mellowness. Dull, subsidized banks should be heavily regulated banks, or, to use the term of art, “narrow banks“.

  2. If we are going to impose a regime that ensures bank profitability, we ought to do so in a reasonably equitable way. Business models that hide profit generators in complex contracts, or that extract fees especially from the disorganized and naive, are not reasonable instruments of public policy for keeping banks healthy. If we do go with the coddled but heavily regulated model of banking (not my preference!), and we’re not willing to have the Treasury end the capitalist charade and just cut checks to its payment-systems subcontractors, then a decent approach would be to have narrow banks offer only vanilla products and provide monopoly rents by putting floors under fees and ceilings above deposit interest rates (as existed in the US until the 1980s). Under either a competitive or “regulated utility” model, the fairness and informational case for defining standardized vanilla products remains compelling.

I think people like Barney Frank, when they try to sleep at night, have been sold on the “we need healthy banks, so let’s protect their profit centers” story, although they’d never admit to it while scoring points comparing powerless people with furniture. I wonder if it even occurs to Mr. Frank that maybe something serious should be demanded of banks in return for state protection of market power at the expense of the weak and disorganized. But then Mr. Frank has already gotten very much in return.

Update History:
  • 27-September-2009, 2:30 a.m. EDT: Changed “contracts” to “contract” in a singular context. Replaced a “to” with a “that” in a sentence with too many “too”s. (No substantive changes.)
  • 6-October-2009, 11:50 a.m. EDT: Added update in text crediting Albert Hirschmann with “exit”/”voice” terminology. Thanks to Chris Mealy.
 
 

29 Responses to “Vanilla is a commodity”

  1. babar writes:

    what did the original proposal consider as ‘vanilla’ products?

    20% down mortgages? what kind of credit card? etc.

    did the original proposal stipulate that all customers would have access to these products?

  2. Yancey Ward writes:

    I have the same question as Babar, and probably the same suspsicions.

    In addition, I would point out that vanilla financial products are always available, it is just that they may not be the first things you are offerred. I bought my house on a perfectly vanilla mortgage financing. There are perfectly vanilla credit cards, checking accounts, and brokerage accounts, you just have to ask for them.

  3. babar & Yancey —The original proposal didn’t specify. Just that there would be vanilla offerings, TBD. That definitely could have been something to fight over, but crappy govt-endorsed “vanilla” products would be a hard thing to fudge or hide. Consumer groups and blogs and Harvard do-gooders would be carping on the contract’s flaws, as would the local news muckraker as soon as an attractive local family got hurt in some sympathetic way by a “vanilla” product. The politics of vanilla are really good — instead of complaining to credit card companies or bad-mouthing banks, angry consumers would contact your rep’s constituent services staff if they think the vanilla contract is screwing them. Congresspeople would have every incentive to ensure that unpleasant outcomes from vanilla contracts are really, really defensible.

    Yancey — There exist products from different banks/brokerages/etc of varying degrees of vanillahood. But that misses the point. To be truly vanilla, the terms that define a product have to be standard across all providers. That is what was radical about the proposal, not the existence of barebones or traditional offerings, which as you point out do exist, but the existence of those offerings in a manner that is widely known and clearly comparable to consumers across banks. Under the status quo, if a consumer shops a credit card, nonprime mortgage (not necessarily subprime, perhaps jumbo with sterling credit), even ordinary deposit accounts, he is foolish to try to do so on price alone (e.g. headline interest rates charged or offered, maintenance fees, etc.). But it can be quite challenging to try to balance all the different dimensions. A consumer cannot easily know how vanilla an account is.

    Consider a simple checking account — vanilla, right? BOA has now changed its overdraft policy for the third time on that account. Tho’ that might not matter to uberrational home economicus, or even to you dear reader, many or most consumers ought to consider the stochastic quality of their own behavior and the risk of error or unforeseen circumstance and include that policy in the price. But BOA’s decisions about whether to pay and bill fees for overdrafts and refuse to pay are discretionary and undocumented. To many consumers of checking accounts, that policy will end up defining a significant part of the price (either in fees or in displeasure/embarrassment at refusal, people might differ in their preferences on that dimension). But it is not possible to shop and compare that dimension of price (again, undocumented and fluctuating), and even if it were, there are often so many non-strictly ordered dimensions to financial product value that only the modest dedicated consumers and finance fetishists would even consider. We almost all fall back upon heuristics — we look at the headline prices, we consider vague factors of reputation, convenience, and reach of the financial institution, and we sign the nebulous contract hoping that some combination of laws, norms, and shame protect us from abuse. And for the demographic that typically reads and writes finance blogs, frankly, they usually do. Personally, I have my couple of shafted-for-$100 stories like Konczal, but for the most part I navigate my checking and credit card accounts okay, thanks. In fact, I’ve had lots of quite good customer service experiences with big banks. But they know a lot about me, they have me well pegged.

    And that’s part of the point — the banks take into account the political and reputational costs of their revenue sources, and quite rationally focus their less standardized fee generators on populations where they feel those indirect costs will be less. Thus, political stories of responsibility and organization enable them to maximize contingent fees and arguably to offer toxic products to more vulnerable populations. That they have undisclosed, “safe, vanilla” products in their backpockets in irrelevant, when consumers don’t know about it, and wouldn’t even be able to distinguish vanilla from jalopeno. (It’s not like high-prepay-fee nonprime-to-potentially-prime-borrower were marketed as toxic.)

    Widely publicized, state-defined vanilla options would do two things: 1) it would give not-particularly-knowledgeable, risk-averse clients something to ask for, something about which they could have reasonable confidence would at least not be unusually dangerous; and 2) it would permit consumers to make apples-to-apples price comparisions between banks without wondering if savings on a headline rate is paid for by a draconian expected cost to human entropy or somesuch.

    BTW, there is one example: Prime mortgages. Obviously, in a macro sense prime mortgages have not been innocent, because Fannie & Freddie offered ‘em to easily on properties they could and should have valued far more conservatively. But for consumers, primes (without odd second liens, down-payment assistence, etc) were precisely a vanilla product. Terms were pretty standardized, customers could comfortably choose to accept a prime mortgage from any provider without fear that unexpected hidden qualities of the contract would come to bite them. Primes are certainly defaulting, but only in the most straightforward way — customers can’t or don’t wish to pay the straight, well-understood, fixed nut any more. The essence of the vanilla proposal is to define something like “prime mortgages” in a wide variety of financial product categories. It would never have been a panacea: Lots of people were obviously effectively steered away from prime during the credit bubble, and the available of broccoli never stopped potato chips from getting popular. But lots of risk-averse consumers did go out of their way to stick with prime, and are much better off for it. Vanilla options wouldn’t be a magic bullet. But they’d greatly improve consumers’ ability to avoid product risk and shop around the financial services they need.

  4. IF writes:

    In Germany grocery used to be sold in standardized package sizes. A chocolate bar usually was 100g, small sizes might have been 50g, while large sizes 200g. No manufacturer was allowed to sell 113g. Similar for milk, bread, cheese etc. The stated reason for this was to have a _transparent_ market, where customers can easily compare two products and manufacturers have to compete via perceived quality and price. Specials like “buy two get one free” as in the US or the UK were not permitted. Some manufacturers never really liked this. One could regularly read stories of singles that were pleading to have these limits restricted, because they had problems fitting a 1l bottle of milk into their tiny fridges. Fast forward to spring 2009 and Germany harmonized their laws with the European Union. Now arbitrary package sizes are permitted, as long as the price per 100g is also listed on the shelf. Nevertheless, manufacturers immediately started sizing games like in the US, hence clouding a formerly transparent market. (The vanilla option here obviously was size.)

    On the hand in the US all food is labeled with nutritional values (mandated by the FDA I believe), which was a rarity in Germany. With discussions on nutrition and plans to introduce a labelinig requirement, many manufacturers started to add similar labels. But interestingly they omitted labels for particularly unhealthy products, as there is no national requirement yet. Now Aldi, a large national discounter, seems to require labeling from their suppliers. This leads to the situation that a product sold at Aldi might be fully labeled, while the same product sold at another store is not (everything else being identical). Apparently it is worth for some manufacturers to deal with the logistics of having two different packages for the same product just to avoid disclosure to some consumers.

    The interesting thing here is that packaging and disclosure rules do not prevent competition between companies. They just steer it and in some cases make it even more fierce. The equilibrium gets moved, hopefully to the benefit of society (competitive prices, healthier food).

    The question is, will 100g chocolate bars survive, having historically been the vanilla option for the nation? It seems manufacturers would need to break the habit first by offering a little more before reducing the sizes. I am sure somebody is working on a study.

  5. IF writes:

    In Germany grocery used to be sold in standardized package sizes. A chocolate bar usually was 100g, small sizes might have been 50g, while large sizes 200g. No manufacturer was allowed to sell 113g. Similar for milk, bread, cheese etc. The stated reason for this was to have a _transparent_ market, where customers can easily compare two products and manufacturers have to compete via perceived quality and price. Specials like “buy two get one free” as in the US or the UK were not permitted. Some manufacturers never really liked this. One could regularly read stories of singles that were pleading to have these limits restricted, because they had problems fitting a 1l bottle of milk into their tiny fridges. Fast forward to spring 2009 and Germany harmonized their laws with the European Union. Now arbitrary package sizes are permitted, as long as the price per 100g is also listed on the shelf. Nevertheless, manufacturers immediately started sizing games like in the US, hence clouding a formerly transparent market. (The vanilla option here obviously was size.)

    On the hand in the US all food is labeled with nutritional values (mandated by the FDA I believe), which was a rarity in Germany. With discussions on nutrition and plans to introduce a labelinig requirement, many manufacturers started to add similar labels. But interestingly they omitted labels for particularly unhealthy products, as there is no national requirement yet. Now Aldi, a large national discounter, seems to require labeling from their suppliers. This leads to the situation that a product sold at Aldi might be fully labeled, while the same product sold at another store is not (everything else being identical). Apparently it is worth for some manufacturers to deal with the logistics of having two different packages for the same product just to avoid disclosure to some consumers.

    The interesting thing here is that packaging and disclosure rules do not prevent competition between companies. They just steer it and in some cases make it even more fierce. The equilibrium gets moved, hopefully to the benefit of society (competitive prices, healthier food).

    The question is, will 100g chocolate bars survive, having historically been the vanilla option for the nation? It seems manufacturers would need to break the habit first by offering a little more before reducing the sizes. I am sure somebody is working on a study.

  6. babar writes:

    i can see a benefit with respect to checking accounts, especially. vanilla mortgages are prevalent, and credit cards are fungible and easy to switch. but with a checking/savings account i am pretty much doomed to use one of the global banks. otherwise i’ll pay a fortune in atm fees esp when traveling.

    so one option would be to get rid of cross-bamk atm fees. good luck on that one.

    but here’s an idea that might work. a consumer union. say you could get together a group of about 10,000 or 100,000 potential customers who want a checking account that significantly constrains what the bank can do in terms of modifying terms. come up with specifics and a negotiating committee. say that you will deliver these customers under two conditions: that they can keep these accounts for five years and that after a reasonable amount of time these terms will be available to anyone who wants it.

  7. Why don’t we turn the banks into regulated public utilities? (Boring banking for houses, cars, schools).

    Then the rich can gamble with their own money instead of looting ours!

  8. crack writes:

    SRW mentions the really insidious portion of existing accounts, which nullifies babar’s claim of vanilla credit card options. That is the unilateral changing of terms. BofA changes my credit card terms all the time, and while those changes are no longer retroactive in nature I have to stop using my card in order to avoid them taking affect on new purchases. Fine, switch you say. Switch to what? Another card that offers me terms that can be changed with little notice? You can’t comparison shop for something whose nature can change drastically after ‘purchase’. The same thing goes for checking accounts. How can anyone judge the cost of a bank account when there is no guarantee the terms won’t change within a year. Who wants to change banks yearly?

    Vanilla would allow shopping for accounts by preventing unilateral change of terms. Laws making accounts fixed at creation would be bad because if a truly bad form of account was made a bank would be stuck with it. A bad vanilla account could still be changed.

  9. Blissex writes:

    «If we are going to impose a regime that ensures bank profitability,»

    This happened a long time ago, as mentioned in this blog previously:

    http://www.interfluidity.com/posts/1160447599.shtml

    and never mind the Fed’s recurrent policy to drive down banks’ borrowing costs to near zero to guarantee enormous profits on their lending, to boost their balance sheets (and their bonuses).

    «we ought to do so in a reasonably equitable way. Business models that hide profit generators in complex contracts, or that extract fees especially from the disorganized and naive, are not reasonable instruments of public policy for keeping banks healthy.»

    One of the essential aspects of the American Dream is that it is immoral to leave suckers their money. Every good Real American’s dream is to find some category of losers to sucker as much as possible and MAKE MONEY FAST. Why should the government punish winners in the financial industry who just want to do that?

  10. Blissex writes:

    «while those changes are no longer retroactive in nature I have to stop using my card in order to avoid them taking affect on new purchases. Fine, switch you say. Switch to what? Another card that offers me terms that can be changed with little notice? You can’t comparison shop for something whose nature can change drastically after ‘purchase’. The same thing goes for checking accounts. How can anyone judge the cost of a bank account when there is no guarantee the terms won’t change within a year. Who wants to change banks yearly?»

    Well, a “free market” guy would point out that absolutely nobody forces you to buy a credit card or to buy a bank account, at all — but the government instead forces you with a gun at your head to pay taxes, and in the government’s own worthless financial instruments.

    And if you think that the convenience of not changing bank accounts every year is worth not shopping around, that is entirely your free choice in a free market.

    And as everybody knows the retail financial markets are perfectly competitive and not at all collusive or oligopolistic.

    :-).

  11. I want to look at this from a different view, although I take your point. I want the CFPA to be an informational source that has the people and resources to give consumers excellent advice about the options available. In that sense, I want to encourage competition. One way to do that is to not require Vanilla Options, but, for the businesses that don’t, the CFPA should have a big Buyer Beware sign posted about this company. They Do Not Offer Easy To Understand Products At All.

    In other words, I want to have the CFPA help consumers get the cheapest and safest product for them. A lot of what we’re worried about looks to me like plain old fraud and professional negligence. These should be investigated and prosecuted. The CFPA should keep a record about complaints, fines, etc., and make that easily accessible.

    My main point would be to require 20% down, to be incrementally increased as housing prices rise relative to other goods. If we want to help the less well off, we should simply pay their down payment.

  12. a writes:

    IMHO the *only* kind of mortgage product should be a fixed-rate mortgage with at least 20% down, the only variety coming from the maturity (5-, 10, 20, and 30- years say). We don’t let Mom and Pop buy hedge funds; I don’t see why they should understand exotic mortgages any better.

  13. winterspeak writes:

    Welcome back, Steve.

  14. David Merkel writes:

    Good post, Steve. I put out my own two cents from a different angle:

    http://alephblog.com/2009/09/26/on-vanilla-products/

  15. Bloix writes:

    I was with you until the powerless people bit. Many of these powerless people have guns and are itching to use them. People who compare Obama to Hitler need to be smacked down hard, often, and in public.

  16. carping demon writes:

    DTL: “If we want to help the less well off, we should simply pay their down payment.”

    How does that differ from a no down payment loan? True, if “we pay their down payment” they might not be underwater as soon, but the main purpose of the 20% down is to get the borrower’s skin in the game, and, we hope, direct loans to just those borrowers who have demonstrated the capacity to build up a 20% down payment, on the assumption that they will be more likely to be able to keep up the mortgage payments. Of course…we could just give them the house.

  17. reason writes:

    Steve Waldmann,

    I heard about this post from another blog. Great that you have made yet another quality contribution!

    IF – Aldi don’t usually stock brand name products, so any OEM products that go to other stores would have to have different packaging anyway.

  18. reason writes:

    P.S. You can buy half-litre cartons of milk – the story about the milk is surely made up.

  19. CD:

    If they keep up the payments, they will keep the 20%. If they don’t, they won’t. That’s an incentive. The point of the subsidy is to help people pay for the house. In this case, their payments will be lower. That’s the net effect of other subsidy proposals.

    I know that I take this for granted, and I shouldn’t because you don’t know my views, but I’m in no way endorsing poor lending standards. The idea is to help the less well off own an asset that they might not otherwise be able to. The fact that they’re less well off doesn’t mean that they are incapable of working hard and being able to pay bills. To the extent that they can’t or don’t, then I wouldn’t lend to them under any circumstances. In that case, as you say, you might as well buy the person a house, if ownership is what you’re striving for.

    I hope that I answered your question.

    Take care,

    Don

    PS What I would do is limit any subsidy to the truly needy.

  20. CD,

    I should add the if the person sells the house, I would have the govt get some of the proceeds if the house is not paid off. In fact, if the house sells for more than the original price, and the house is not paid, I would have the govt receive a portion of those proceeds as well.

    What I’m arguing for is a plan in which the subsidies, or gifts, if you want to call them that, and the incentives are plainly observable for everyone to see. Also, the subsidies are confined. I am not for a blanket subsidy for home ownership. This plan makes the amount of the subsidy obvious. It isn’t hidden in tax exemptions.

    Finally, the point of the plan is to increase home ownership and decrease inequality. I have no figure for how many people would be helped by this plan. That should be determined by the number of people who can qualify under our prudent lending standards. The point is to simply help some people who have one hell of a time saving, but who are otherwise reliable and trustworthy. We’re trying to help them turn the rent money into an asset.

    Don

    PS Next time, try and figure out these points for me. I’m trying to write unpublishable novels after all. I only have a limited time during which I can defend my idiotic political and economic beliefs.

  21. I kept forgetting to tell you that I’m with you 100% about Narrow Banking. Good point.

  22. carping demon writes:

    Don

    It sounds reasonable. A lot would rest on what you call “prudent lending standards” which we don’t seem to be particularly good at. I’m doubtful we could effect them given the growing number of less well off and the deminishing number of banks.

    I’m not sure I understand your last P.S., but if you’re looking for unpublishable novels I’ve a couple I could send you.

  23. chrismealy writes:

    “Exit” and “voice” come from Albert Hirschman’s “Exit, Voice, and Loyalty.” He also named the conservative complaints, perversity, futility, and jeopardy.

  24. I think that you’re going to have to write a post about Narrow/Limited Banking. Even Martin Wolf can’t get many people interested in discussing it. Incredibly, people are writing whole treatises about ideas that are tinkering with the system at best. As I just e-mailed to Martin Wolf, the lack of discussion about Narrow/Limited Banking outside of Wolf, Kay, Buiter, Peston, and a few others, is unreal. I’m not saying that we should change tomorrow, but the lack of interest is astounding.

  25. MC Morley writes:

    What a well written piece.

    Your discussion and words “…for the privilege of being normal…” deepen an idea that stuck in my mind from one of Marshall’s works in which he challenged harsh interpretations of subsistence from the 1800′s – He said subsistence must include consideration of “social necessities”.(1870′s – I don’t recall the source) Of course devaluation of human life has been the routine punishment for anyone trying to be normal when they are “furniture” in the minds of people with power.

    First time visiting Interfluidity – what a great site!

  26. reason writes:

    Re Narrow Banking

    I think I would like a post on FIRE (Finance, Insurance, Real Estate) – how it became so big and how it manages to cream off so much of the surplus of society while apparently contributing so little to welfare. The logic for its existance should be that it more equitably spreads risk, but in fact exactly the opposite is happening. Why is that?

  27. glory writes:

    Bernanke on regulatory reform – “As the Congress considers financial reform, it is vitally important that consumers be protected from unfair and deceptive practices in their financial dealings. Strong consumer protection helps preserve households’ savings, promotes confidence in financial institutions and markets, and adds materially to the strength of the financial system. We have seen in this crisis that flawed or inappropriate financial instruments can lead to bad results for families and for the stability of the financial sector. In addition, the playing field is uneven regarding examination and enforcement of consumer protection laws among banks and nonbank affiliates of bank holding companies on the one hand, and firms not affiliated with banks on the other hand. Addressing this discrepancy is critical both for protecting consumers and for ensuring fair competition in the market for consumer financial products.”

  28. Great post Steve,

    I wanted to make the same comment that Ezra Klein did. Your part on complexity problems and costs is very important and good. I discussed the same issue two weeks ago in a comment to an Atlantic Post by Mike Konczal:

    A general comment is that one of the things that’s assumed away typically in freshwater models is the costs of calculation, information gathering, and just complication. These things can entail tremendous time costs, time that could have been spent producing things, and can add great risk to people’s lives, because it can be very hard to know what’s going on, and if there’s something you’ve missed that can really hurt you financially, or devastate you.

    And excessive risk can really lower people’s utility (quality of life), as most Americans have learned over a generation of Republican dominance.

    When freshwater economists and libertarians leave us with these Rube Goldberg schemes to avoid government at any cost, one thing they ignore is the complication costs, and that people aren’t able to make massively complicated calculations instantly, and don’t have the years of specialized education and training often necessary to make them well, and even if they did, there’s a great deal of time to be spent gathering the needed information.

    An example of how these costs can be in the trillions per decade is how much higher administration costs are for our fragmented health care system versus single-payer (and we already have single-payer and it has vastly higher satisfaction than private insurance; it’s Medicare for our seniors). Furthermore, the figures that report the trillions in cost per decade only count the costs on the provider end; they’re not even counting the time, unpleasantness, and risk (of making a mistakes and the insurer not paying) costs to hundreds of millions of consumers.

  29. Polprav writes:

    Hello from Russia!

    Can I quote a post in your blog with the link to you?