Tuesday, March 2, 2010

Consumer protection, if it sounds too good to be true, it isn’t.

Consumer Protection

No one can be against the idea of more aggressive consumer protection. It is almost good by definition. However, as with so many things that sound good by definition, it sounds good because it isn’t defined. It’s exactly the sort of thing that politicians love. Needless to say, it will be included in whatever is enacted.

But, you have to be incredibly naive to believe our leaders will protect consumers. Who's going to tell a young couple they can't afford their dream McMansion, or cut off their credit card if they are over extended? Government seems to be pushing in the opposite direction. It's a shame. Many people have borrowed their way into a hard life. It’s like the government is running the company store through Fannie, Freddie, FHA, student loan programs and GMAC. Get them in debt and keep them there.

Look at the new credit card regulations if you need an example. There is nothing in the regulations that will protect consumers from piling on debt until they can’t service it much less pay it back. Nothing to preclude offers of more credit to people who are already delinquent.

Why not use the (now banned) concept of universal default to protect consumers? Before the ban, card companies raised rates when any debt became delinquent because the delinquency indicated an increased risk of default. If so, why not consider a rule forbidding additional credit offers when any credit is delinquent by some number of days. Perhaps it’s a good idea, perhaps bad, but can a government that tries to borrow its way through its own deficits be expected to even consider whether something that constrains debt is in consumers’ best interests?

FHA is probably the most telling example of how little the government cares about protecting consumers. The government has become the new sub-prime lender. They will lend up to 97% of the appraised value of the house. Given the margin of error in appraisals (which is at least 5%), that nominally 97% loan-to-value ratio can easily be a 100% loan. If that’s not bad enough, instead of a teaser rate, the government offers a tax credit! They’re encouraging these new “home owners” to rent money instead of renting a place to live. If home prices go down or the consumer misses a few payments, bingo: more people under water.

At the macro level, we will never straighten out our balance of trade until we start putting capital into producing things to export instead of lending it to people to buy imports. But, do you really expect politicians to tell their constituents that they need to invest more and consume less. The politicians can’t even do that themselves.

Trusting Washington to protect us from debts is like asking an alcoholic to tell us when we’ve had enough to drink.

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