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Elizabeth Warren, simplification in lending, and competition

Mark D. White

Harvard law professor Elizabeth Warren, special adviser to the secretary of the Treasury for the Consumer Financial Protection Bureau, has an op-ed in the Wall Street Journal this morning (subscription may be required), in which she argues that simpifying consumer credit products will please both consumers and lenders and will promote competition. After describing meeting with a variety of lenders, she writes:

The very early feedback I've received indicates that the industry is eager for simplification. Some bankers have told me that a short, easy-to-read agreement is exactly what they want. And many others have expressed their interest in working with the new agency to advance a robust market for consumer credit—one that produces real competition that benefits millions of Americans.

If in fact "the industry is eager for simplification," what exactly is stopping them from achieving it? If consumers want simplification, why aren't lenders bending over backwards to give it to them? Is there some Prisoners' Dilemma in the industry that is preventing these win-win situations? It is difficult to see how: if consumers respond positively to simplified products, then lenders have a clear incentive to provide them, especially if other lenders don't. Government action is rarely needed to promote competition; why is it needed in this case, especially in the absence of Prisoners' Dilemma-type problems?

Perhaps she's arguing that simplification must be an industry-wide effort, e.g. to standardize the presentation of key terms and provisions on common lending products, which was already done to some extent by previous legislation. (If you've received a credit card offer recently, you've seen the effects.) But even if consumers want more standardization and simplification, there are ways to achieve it without a new government bureaucracy: for instance, entrepreneurs are free to launch magazines or websites (like Consumer Reports) which focus on lending products. (In fact, there are many: just search Google for "credit card comparison site," for instance.) If this service is important enough to consumers to warrant government action, it should be important enough for them to support such a private concern as well.

(For more on Professor Warren, financial reform, and libertarian paternalism, see this previous post and the paper linked within.)

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