Narrowly right but broadly wrong: Part 2, broadly wrong
[Continued from yesterday’s Part 1.]
I am the hero of my own life
All things flow through me
When last we left our heroes (or villains), as reported in The Wall Street Journal, they had dodged a bullet in
Problems were also developing for the industry in
Those who think that “they’ll address this effectively in regulation” have never been through the reg-writing process. If the legislators punt to the regulators, the regulators are guaranteed to punt
Don’t try to block a legislator punting!
In October 2002, Ameriquest and Mr. Andrews’s lobbying firm contributed $4,500 to five
Nine hundred bucks apiece. Wow.
The American Financial Services Association, a subprime industry group that included Ameriquest, predicted the law would cause lenders to abandon the state. Nevertheless, in the spring of 2003, the bill passed the state Senate and was signed into law.
At that point, opponents of the new law got some help. Just as it had done in
Of course it did – exactly the same logic applies.
In addition, federal banking regulators issued a series of regulatory orders banning states from applying state consumer-protection rules to federally chartered banks and thrifts, part of a turf battle between federal and state regulators.
A not-unreasonable turf war, for the simple reason that if you are regulated for one thing by one entity, you should not be regulated by another entity for that same thing.
That put pressure on states to soften predatory-lending rules so federally chartered banks didn’t have an advantage over state-chartered ones.
Cut to the chase: the lobbying campaign worked.
Get to the point or I’ll shoot this blog
In June 2004,
Get ready for another bout of Zoroastrian logic:
Thousands of
With this guilt-by-proximity conclusion, the Journal’s piece basically finishes:
In the wake of the collapse of the subprime market, Mr. Andrews’s subprime lobbying business has withered. The three trade groups he ran are gone, and most of his subprime clients have stopped lobbying.
There’s no more lobbying-fee fruit to be picked from these withered groups
Well, they have nothing to lobby for.
“I certainly was not aware of the degree to which many in the industry clearly failed to follow proper underwriting standards — the standards which they represented they were following to those of us who were lobbying,” Mr. Andrews says.
George Orwell’s reputed phrase ‘useful idiots’ comes to mind; so does ‘willing suspension of disbelief.’ But then, I’m grizzled and cynical and have been used in similar ways more times than I care to admit.
The tactical trap of narrowly right. That is the trap of defending the narrowly right but broadly wrong. Even as the industry fought off ill-thought legislation, I suspect it was deaf to the underlying public-policy concern – namely, that brokers will bamboozle clients into taking out financially voracious loans – and indifferent to the lawmakers’ desire to develop something better.
From where we look at it, there’s no problem at all
In the days when I was in a science fiction writers’ workshop, one of our principles was, If you see a flaw, you are duty-bound to offer an improvement. A similar philosophy should apply to public policy. If the legislators’ attempts to solve the problem are ham-handed and unwise, those who are expert have a moral duty, if no other, to help them create better laws. If you don’t embrace the legitimacy of the policy concern, you have no right to complain when they enact something that’s inadvertently damaging to you.
The strategic trap of narrowly right. Beyond the tactical reason – enlightened self-protection – the strategic trap is simpler. Lenders are experts in finance, customers are amateurs. That information asymmetry should impose on lenders the financial equivalent of the physician’s ‘duty of care’ – an obligation to give the customer enough information so that the customer can make an informed decision.
I’m not advocating that the lender has to stand in for the customer (as is contemplated by the impossible-to-meet “proof of tangible net benefit” standard). Rather, the lender – the expert – should be obligated under what I think of as the good-friend test. “If someone came to me for this product and I were her very good friend, what would I tell her or ask her before I acceded to her request?”
Even a bear of very little brain knows to question a refinancing before signing up
The good-friend test doesn’t prevent the professional from doing business, and it doesn’t impose the professional’s judgment over the customer’s. It simply requires the professional to exercise a little bit of professional caution, to temper the customer’s enthusiasm, so the customer has a chance to temper herself.
I have read that antiques dealers (or wine merchants) are already in a similar legal position. If they, invited to a customer’s home to review or assess an inventory, give misleading information or otherwise exploit their greater knowledge to buy the goods for themselves at much less than fair value, they are liable to litigation. It’s the principle of a presumption of honest reporting, and that’s a good principle. If I, the expert, suppress information known to me, or generally known to any expert in the field, and use that suppression to cheat you out of your fair price, I have bilked you.
In the long run, such a rule also benefits the profession of expertise, because it encourages customers to trust professionals. If they know that the professional has a duty to explain, even if in tedious detail, customers are more likely to confide. So while the rule is against the industry’s short-term interests, it serves their long-term interests.
“Personally, I think and have long felt the Fed should have done more early on,” Mr. Andrews says. “But I don’t think anybody realized the level of problems that were going to come out in the last year or two. If you had said to me the industry was going to melt down, I would have said you were absolutely insane.”
Wouldn’t it be nice, Mr. Andrews, if all your clients’ customers had had better disclosure before they took out the loans? Wouldn’t that make their legal position, and their moral/ political position, much more comfortable if they had demonstrated solicitous concern before swapping money and signing papers?
Only one thing matters – get them to sign on the line which is dotted
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