The Dangers Hidden in the Consumer Financial Protection Bureau

The road to hell is paved with good intentions. With all due respect to my Foolish colleagues Brian Richards and Ilan Moscovitz, that unfortunate fact of life seems to have been missed in their eloquent defense of the Consumer Financial Protection Bureau, or CFPB.

Even in a perfect world, and even if you assume the purest of intentions, no law Congress can create is more powerful than the Law of Unintended Consequences. The side effects from those unintended consequences of legislation often wind up being quite worse than the problems the legislation meant to address.

The lessons from Prohibition
Think back to the 18th Amendment to the U.S. Constitution, which criminalized most alcohol in the United States, thereby beginning Prohibition. While the law's intentions of protecting people from the downside of their own and their neighbors' poor behavior while under the influence may have been noble, its consequences were anything but.

It was Prohibition, after all, that enabled organized crime in America to flourish. People wanted their alcohol, and with it deemed illegal, those who provided it had to operate criminal organizations to produce and distribute it. During Prohibition, tens of thousands of "speakeasies" provided access to illegal booze at a very expensive price.

Rather than ridding the country of alcohol, Prohibition simply made it more costly and moved it underground, where it could do even more damage. That's not exactly what Prohibition's supporters wanted, but it's what they got. Ultimately, Prohibition's unintended consequences were bad enough that the 18th Amendment was repealed and alcohol again legalized.

So what happens when, in the name of "protecting consumers from unfair treatment in consumer finance," the CFPB forces lending to risky borrowers underground? Do loan sharks again proliferate? And instead of paying high market rates with civil penalties for breach of a valid borrowing contract, do deadbeat borrowers risk life and limb for failing to pay the local loan shark rates that are even higher than today's payday lenders charge?

How that could happen
There's more to the CFPB than simply assuring clear disclosure or enforcing existing laws. Disclosure doesn't require a new bureau, and if lenders are breaking laws, there are already courts and both criminal and civil penalties to deal with them. To the extent it uses its authority to "issue rules" to actively regulate from the bureaucracy, the CFPB forces lenders to work around those rules to be able to be sufficiently compensated for their risks.

Lenders, after all, only have a handful of levers they can pull when it comes to their products:

  • The interest rate they charge for the use of their money,
  • The fees they charge to set up and service those loans,
  • The other terms (like prepayment penalties, late charges, and balloon clauses), and
  • The lending standards they follow in order to choose who to lend money to.

So what happens when the CFPB determines that one of the levers a lender is using is "unfair" to a prospective borrower? After all, one of the bureau's stated missions is to "Restrict unfair, deceptive, or abusive acts or practices." Well, to some extent, the lender finds another way to get compensated for its risks by pulling on a different lever.

After enough of that "whack-a-mole" between regulator and lender, the lender has no real choice but to tighten lending standards and simply refuse to lend that risky borrower money. At that point, it's goodbye to open, transparent, legal (though expensive) lending to risky borrowers -- and hello to Louie the Loan Shark and his "left or right kneecap?" concierge service. If you really need money and can't get it legally, the only options you're left with are illegal ones.

Or fan the flames of the next crisis
Of course, the other tack CFPB could take in its quest to "protect" consumers from the finance industry is to strong-arm captive lenders into loaning money to anyone with a pulse. If that sounds familiar, it's because that's essentially what happened when Fannie Mae and Freddie Mac (both "government-sponsored enterprises") started buying and insuring risky mortgages. And we all know what an absolute nightmare that turned into.

Banks do stupid things, and people do stupid things, too. But when an individual or a private company does stupid stuff, the consequences are limited to the reach of whoever screwed up. It takes active government action to turn stupid lending standards into a nationwide financial crisis.

When it comes to the CFPB, it's not the "education" or "disclosure" that creates risk. The power to judge what's fair and the rule-making authority that goes along with it makes the agency a potential incubator of either dangerous loan-sharking or the next nationwide financial crisis.

What do you think? Let me know or let me have it in the comments below.

Chuck Saletta is a Fool contributor and doesn't own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.


Read/Post Comments (57) | Recommend This Article (22)

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  • Report this Comment On June 22, 2011, at 4:16 PM, DJDynamicNC wrote:

    Your argument here seems to boil down to simply pointing out that there are some potential flaws in the CFBP as it currently stands, and that it could cause the next financial crisis.

    I'd like to pause here to ensure that we don't overook the fact that regulation via the CFBP is a reaction to the actual crisis that actually occurred when actual banks actually screwed over our actual economy after a spiral of deregulation.

    It is nearly certain that the CFBP will not be run perfectly. But it is equally certain that an unregulated economy is a timebomb waiting to happen.

    We all accept the need for regulation of the economy - you don't trade your stocks on the Somalian Stock Exchange, do you? - and while it's worth pointing out the risks, let's not - as the President would say - make the perfect be the enemy of the good.

  • Report this Comment On June 22, 2011, at 4:19 PM, DJDynamicNC wrote:

    As a final point, this statement you made:

    "But when an individual or a private company does stupid stuff, the consequences are limited to the reach of whoever screwed up"

    ... is technically true. But as you surely must be aware, the reach of an individual or company within an interconnected economy is virtually limitless.

    See Tulip Bubble, Technology Bubble, 2008 Financial Crisis, and Great Depression for details.

  • Report this Comment On June 22, 2011, at 4:20 PM, GR2010 wrote:

    I think that the first five paragraphs of this article are filler.

    And I think the rest of your argument is a pretty flimsy straw-man. You're saying that if we regulate predatory lending practices, people will resort to loansharks who will threaten them, life and limb.

    I think there might be a middle-ground outcome, where lenders are required to be a bit more clear about their products, and consumers have a marketplace that they can more easily understand -- and one in which they are still free to make good or bad choices.

  • Report this Comment On June 22, 2011, at 4:29 PM, Konadreamer wrote:

    "After enough of that "whack-a-mole" between regulator and lender, the lender has no real choice but to tighten lending standards and simply refuse to lend that risky borrower money. At that point, it's goodbye to open, transparent, legal (though expensive) lending to risky borrowers -- and hello to Louie the Loan Shark and his "left or right kneecap?" concierge service."

    And what is wrong with having tight lending standards? Sure would have helped in averting the recent financial crisis and resulting recession!

    "But when an individual or a private company does stupid stuff, the consequences are limited to the reach of whoever screwed up."

    Well, that is unless they are deemed too-big-to-fail, like AIG, right? Then we all pay for that!

  • Report this Comment On June 22, 2011, at 4:51 PM, BroadwayDan wrote:

    I'm with Chuck. Great article. Simplicity, clarity and integrity should be things banks use as competitive advantages to create new products. And the free market should decide which companies are best. With countless people having mobile phones, more precisely, mobile computers, and countless blogs/sites offering excellent product recommendations and transparent looks into companies, consumers should be able to decide if their credit cards, etc. are working properly. And if not, immediately take their business to a place that treats them right. I find the argument to beware unintended consequences to be completely valid.

  • Report this Comment On June 22, 2011, at 4:51 PM, neamakri wrote:

    An excellent counter-point article. Makes me think.

    You are surely correct; anytime the government steps in to "make things fair" there is ultimately a downside, either small or large.

  • Report this Comment On June 22, 2011, at 5:32 PM, DJDynamicNC wrote:

    I agree, Miracle - the banks SHOULD use these things as tools for marketing.

    But they aren't. If anything, they've gone further and further the other way. Why? I would speculate that it's because there is more money to be made fleecing people than there is in building honest relationships, particularly when your competition is fleecing them too so you have a ready supply of fresh customers fleeing other banks. But that is just speculation.

    How long should we let this go on before taking better steps? How many lives should we allow to be ruined before we step in with some common sense ground rules?

    We have come far enough. The line must be drawn.

  • Report this Comment On June 22, 2011, at 5:33 PM, alex79818 wrote:

    Respectfully.....Chuck, what you're saying is ridiculous.

    Where is this army of loansharks now? Have they been lying in wait all these years, waiting for the day conditions were right for them to re-emerge so as to once again break kneecaps? Perhaps there's an underground bunker full of wise guys from the '40s, all in cryogenic sleep, ready to be wake when the dark princess Warren sits on her throne of skulls...

    Please. The impetus for the CFPB is that fraudulent predatory lenders violate the law with impunity because the system is on their side and the law has no teeth. With the CFPB in place, if you're a lender, and you violate the law, you pay the price - and if you're a loanshark, you pay the price plus the jail time for the corresponding violent offense.

    So let them come out of the woodwork...Liz will be ready for them.

  • Report this Comment On June 22, 2011, at 5:53 PM, xetn wrote:

    The problem with the CFPB is the same as the problems of all regulators. They don't do their jobs. An example: The Fed had complete oversite responsibility for all banking long before 2008 but did it see any problems? Nary a one as Bernanke testified before the House. One could make a good case that The Fed was the primary cause for the housing bubble and lack of oversite. After all, the Fed was created by the Big NY Banks for the Big NY Banks.

    The real problem with having these kinds of regulations is they create a "moral hazard" in the sense that most people believe they are protected, but in reality it is the (in this case) the banks that are protected. Just ask yourself who benefited after the collapse?

  • Report this Comment On June 22, 2011, at 5:56 PM, xetn wrote:

    I forgot to add that the Dodd-Frank regulations were written primarily by GS. And, I would bet that most if not all of those in Congress that voted for it never read it nor do they understand it.

  • Report this Comment On June 22, 2011, at 6:10 PM, kannankeril wrote:

    "lessons from Prohibition"

    How about lessons from a more recent period like the most recent economic collapse - do we learn anything from our mistakes or do we just blindly parrot out the "free market leads to optimal eficiencies" mantra?

    I have got to the point where I would rather the encumber the banks with having to deal with regulators rather than leaving the free to take me to the cleaners with no consequences.

    Chuck - sorry man, this looks like a placement piece from your benevolent masters.

  • Report this Comment On June 22, 2011, at 7:32 PM, 11x wrote:

    I want to know why we were fine for 200 years without the CFPB but one recession, caused by de-regulation of the banks, and greedy homeowners who knew what they were getting into but were looking at immediate house price appreciation, not worrying about what would happen 5 years down the road when their ARMS or interest only loans reset payments to higher monthly payments, warrants more government bueraucracy.

    We already have bureaus in place that should have prevented the financial collapse. We don't need more.

  • Report this Comment On June 22, 2011, at 7:33 PM, Lynken wrote:

    I applaud the effort taken to actually write such an article but it is so clearly in vain as no one can really come up with any good reasons for the CFPB to not exist even after our most recent financial crisis.

    After all, this article was only written because a few die-hards on the boards wanted the "other side of the story" and the best that could be mustered is "watch out for the loan sharks"? I don't expect for a single minute that the reaction to the CFPB is that loan sharking will somehow become the go-to source for money and to propose it as one of your "main points" is clearly showing just how flimsy the argument against the CFPB is.

    Not everything in media as a source of "news" has to be unbiased and that includes The Motley Fool. If an article was written that paints a favorable color to the CFPB it's probably because there's very little downside to its creation and smart investing is what it's all about. CFPB is all about helping would-be borrowers make the safest decision when it comes to loans and if at the end of the day those people can save and invest some of the cash they saved by not having been screwed by deceptive loans/lenders then I'm all for that.

    ...I know tons of other Fools are as well.

  • Report this Comment On June 22, 2011, at 8:39 PM, Gunseng wrote:

    This article is one of the few that speak the truth. History, being that the deregulation of banks causes financial meltdowns due to corporate greed, had really took off starting with Mr. Ronald Reagan and has grown into a larger issue with each new president who deregulates it more. No sides are immune, the Democrats and the Republicans control the country with expensive advertising campaigns that leave competition in the dust. Few people realize that Bill Clinton, George Bush I and II, and Barack Obama all have this one thing in common....They are supporters of people like Bernanke, and spokesmen for the deregulation of the financial system.

    But this is not a problem isolated to the United States. All around the world crooked deals are made and billions upon billions are presented to single individuals as their companies go bankrupt and all investors lose their principal. Every day the rich (and in some cases corrupt) are getting richer and the poor are getting poorer.

    History repeats itself in the 21st century using a new angle that was created not even that long ago in human history, which has propagated beliefs advertised by the rich using advanced media technology like television and computers.

    This angle is the financial markets...

  • Report this Comment On June 22, 2011, at 9:41 PM, scavanna wrote:

    The biggest truth is the obvious Regulations did not prevent the financial crisis last time and it wont inthe future. The law of unintended consequences is alive and well. There is much truth in this article

  • Report this Comment On June 22, 2011, at 9:45 PM, TMFBigFrog wrote:

    Hey Fools --

    Interesting discussion. But consider this: According to Yahoo! Finance, Advance America -- a Payday lender -- has a net profit margin of 6.71% (based on most recent TTM earnings). You can see the details, here: http://finance.yahoo.com/q/ks?s=AEA+Key+Statistics

    That's hardly a gigantic margin (Google's margin, for instance, is reported as over 28%), and Advance America operates in the legal Payday lending business -- the part of the lending market most often held up as being "unfair."

    I'm going to go out on a limb here and say that Advance America's (and other payday lenders') customers don't go there because they WANT to pay those fees. Rather, those customers show up there because they need money and don't have any other (legal) options.

    So what happens when Advance America and other payday lenders' practices are targeted in the name of 'fairness'? Does it "absorb" the costs? How? The company's net margin is in the single digits. There doesn't appear to be much room for error with such slim net margins.

    Does it "Whack-A-Mole" its pricing structure to make up the costs elsewhere? In which case, where's the net benefit to those consumers?

    Or does it stop lending to those high risk borrowers and/or shut down? In which case, how and where to those high risk borrowers get money? It's not like they have other lenders beating down their doors offering them cash.

    I walk by a payday lender near my office nearly every day. And every time I do, I think "There but for the grace of God..." I'm not a fan of the business, but I'm even less of a fan of the most likely alternative -- desperate people with no legal access to cash.

    -Chuck

    (No position in any stock mentioned)

  • Report this Comment On June 22, 2011, at 9:50 PM, mcampbell8 wrote:

    Why would banks and financial institutions be against the CFPB? Simple, a system with few regulations and accountability will allow them to get away with ripping off more people. It's easy to pay small fines and keep the majority of their ill-gotten gains without even admitting any wrong doing.

    I am not an advocate of over regulation. But the consumer is on the losing end when financial companies can bundle toxic products and contaminate the entire system. How many consumers, companies and governments (at every level) have suffered due to these practices?

    I wish it was limited. But we all ultimately lose. Unless you are backed by unlimited taxpayer bail outs with the dire prediction that if nothing is done, the whole system will come tumbling down. The right regulations limit the damage to a smaller group and total deregulation opens up the entire system to corruption and manipulation.

    You are on the wrong side in this picture. Good regulations protect the integrity of the system and allow everyone to compete fairly in the marketplace.

  • Report this Comment On June 22, 2011, at 10:09 PM, VintonCounty wrote:

    You expressed your points effectively. Here is another approach that relates to usury laws and is an axion: Price controls are always bad. Always.

  • Report this Comment On June 22, 2011, at 10:15 PM, ershler wrote:

    scavanna,

    How can you argue that Glass-Steagall didn't do a good job until it was repealed? The lesson that should be learned is you can't trust the financial industry to regulate itself.

  • Report this Comment On June 22, 2011, at 10:33 PM, tramagli wrote:

    On the surface, the intentions of the CFPB are good and necessary. But the potential problem lies in the rule making and arbitrary determination of unfair and deceptive. The problem with any government mandated law, pick any artificial, man-made law-they're all the same, is that the law cannot differentiate between good and bad.

  • Report this Comment On June 22, 2011, at 10:40 PM, Smitmiller wrote:

    People seem to assume a direct correlation between regulation and accountability, that when the former increases, so does the latter. That might be true for a low level of regulation, but after a certain point, all that regulation seems to do is replace common sense and make things more complex. Individuals and companies start doing stupid things because "no problem, it's insured" or "it's legal so it must be OK!"

    This leads to more regulation, leading to more stupidity, until a tipping point is reached and people decide what is needed is less regulation.

    Unfortunately, the stupidity by then is endemic in the regulated industry, where people have lost any semblance of common sense. Also, it's almost as hard to be consistent while writing fewer rules as it is to be consistent while writing more rules.

    So bad things happen, and they're blamed on less regulation rather than on stupid decision making. Which leads to more regulation.

    The only way to break the cycle is to reduce the level of regulation and then allow the idiots to suffer. Sometimes that means a lot of suffering, including suffering of the innocents. However, we also suffer due to overregulation; we just get to pay for the privilege of suffering, while thinking that we must be suffering less because we're "protected" by the regulation.

    But can you imagine the amount of regulation that would have to be reduced, in all sorts of industries, in order for this to work?! Regulations are like fresh ink on a stack of papers. They bleed into areas that seem to have no relevant link.

    This is why I believe that the CFPB will not make us safer, but once it's in place, it will be darned hard to get rid of safely.

  • Report this Comment On June 23, 2011, at 3:54 AM, ershler wrote:

    Smitmiller,

    How does your argument relate to the second part of the financial crisis, derivatives that were never regulated?

  • Report this Comment On June 23, 2011, at 9:00 AM, buffalonate wrote:

    Fannie Mae and Fannie Mac didn't strong arm anyone into making crappy loans. They were late to get into the subprime business. The CEO of Fannie Mae publicly stated that he started buying subprime loans because they were becoming such a large part of the market that he was afraid his company would be marginalized if they didn't buy subprime loans.

  • Report this Comment On June 23, 2011, at 9:22 AM, Rockfish88 wrote:

    I'll take unintended consequences over unregulated banks any day. We've already seen how stupid banks can be, let's at least make them be stupid in full view of their customers and the public.

  • Report this Comment On June 23, 2011, at 9:30 AM, XMFDRadovsky wrote:

    As a counterpoint to TMFBigFrog's comment, I would like to point out that the astronomical APRs of such lenders as Advance America, Cash America, et al - approaching 400% - is a pittance compared to the effective APRs of overdraft penalties that banks do charge their customers. I mention this as a reason to have a CFPB, not as a rationalization for the existence of payday lenders.

    Dan

  • Report this Comment On June 23, 2011, at 10:12 AM, rhutmacher wrote:

    TMFBigFrog, the pay day lenders are a great example of a service that will in all likelyhood go away or get even more expensive as a result of the CFPB.

    TMFDRadovsky, as of August last year, banks are no longer allowed to charge overdraft penalties for debit cards without express written permission from their respective customers. I don't see how those fees and the CFPB are related.

  • Report this Comment On June 23, 2011, at 2:04 PM, Smitmiller wrote:

    Ershier,

    You asked how my argument relates to the second part of the financial crisis, derivatives that were never regulated.

    The very institutions that were involved in derivatives were also the ones under enough regulation in the financial markets to render them stupid. Instead of saying, "Gee, these mortgage-backed derivatives are a New Thing and we should be careful," they said, "Freddie and Fannie are packaging and guaranteeing them, so they must be OK!" Guess that's another way the ink spreads. And why once an industry is regulated to this point, it's hard to have any aspect of it less regulated or unregulated.

    A possible counterpoint might be the hedge funds, which from what I understand were lightly regulated and were the last to go during the 2008 financial crisis. Hedge funds could do stupid things, or more risky things, but they had no safety net (insurance, government guarantees, etc.), so they tended not to do stupid things--and if they did, they didn't last long. However, I don't know enough about hedge funds to know for sure.

    Thanks for bringing up the derivatives aspect.

  • Report this Comment On June 24, 2011, at 6:40 AM, skypilot2005 wrote:

    On June 22, 2011, at 7:33 PM, Lynken wrote:

    "I applaud the effort taken to actually write such an article but it is so clearly in vain as no one can really come up with any good reasons for the CFPB to not exist even after our most recent financial crisis. "

    I also, applaud The Fool for running this piece and having a comments section. By the end of this week we will be better informed on the issues surrounding the creation of the CFPB. Isn’t that really what The Fool is all about? This is much better than a one sided pronouncement and is a service to our Fool Community.

    According to many posts here, predatory lending is a common practice.

    Why aren’t the current laws being enforced?

    The Department of Justice has a budget of over $27 Billion.

    The Department of Treasury has a budget of well over $10 billion.

    Some contend many of us are being taken advantage of by financial institutions because of sophisticated techniques commonly used by them.

    The Department of Education has a budget of well over $69 billion.

    Still others contend that creating another bureaucracy and spending $340 million every year to start is going to “make the difference” in protecting consumers and providing greater pricing transparency?

    History does not support that position.

    The banks aren’t treating you right? Join a Credit Union. I’ve been a member of one for over 25 years and it offers better rates and lower fees. Hit the “evil” banks where it hurts, in the pocket book. Stop being a whinny “victim” and take control of your future.

    The CFPB has a fashionable name but is not needed.

    Fool On

    Sky Pilot

    Proud Credit Union Member

    Disclosure: I do not work for a credit Union nor do I know anyone that does. Although, I wouldn’t mind having lunch with teller #3…..

  • Report this Comment On June 24, 2011, at 6:51 AM, skypilot2005 wrote:

    On June 23, 2011, at 9:30 AM, TMFDRadovsky wrote:

    "As a counterpoint to TMFBigFrog's comment, I would like to point out that the astronomical APRs of such lenders as Advance America, Cash America, et al - approaching 400% - is a pittance compared to the effective APRs of overdraft penalties that banks do charge their customers. I mention this as a reason to have a CFPB, not as a rationalization for the existence of payday lenders.

    Dan"

    Please expand on how APR % relates to overdraft fees? You are presenting an instrument that is not supported by actual funds when you present it.

    Seems to be comparing Apples and Oranges....

    Sky Pilot

  • Report this Comment On June 24, 2011, at 7:35 AM, XMFDRadovsky wrote:

    skypilot,

    Overdrawing a checking account would incur a fee from the bank. This is essentially borrowing money from the bank. That fee can be looked at as interest on the loan that the bank just made.

    A payday lender also charges a fee for lending its money. This fee is also looked at as interest on the loan.

    So I do think it is comparing like objects.

    Dan

  • Report this Comment On June 24, 2011, at 7:39 AM, devoish wrote:

    Payday lending is probably not a good solution to the problem of employees working for less than it costs to live.

    Better pay and benefits probably is a better solution.

    TMFBigFrog

    You have come out against the CFPB, suggesting it is unneccessary protection for consumers.

    Would you review your credit card agreement and confirm for us whether or not you can have your CC interest rate raised on pre-existing balances in the event your phone company makes a billing error and claims you have not paid?

    In the event it is possible can you describe what the penaltys are, and what the interest rate goes up to?

    Could you also share the page/pages that contain that language and help us all know what to look for so that we may all choose CC agreements that do not allow such a practice?

    And just for giggles, would you describe the time and process of discovering these paragraphs?

    Thank you and best wishes,

    Steven

  • Report this Comment On June 24, 2011, at 8:01 AM, dbtheonly wrote:

    TMFDRadovsky,

    The problem comes that you are applying an Annual Percentage Rate to a loan that is designed for a few weeks at best. As an example; charging only $1 for a loan of $50 for a week would come out to close to 100% over a year. let's set aside the arguments about whether pay-day loans are good or right and focus on what interest is legitimate for a loan of a week or so.

    Equating a one-time fee to an interest bearing loan does not really hold up. You are charged the over-draft fee once per occurrence, not on the size of the overdraft. That's where we get the stories of the $40 Starbucks coffee. $5 or $5000 you pay the same over-draft fee.

  • Report this Comment On June 24, 2011, at 8:07 AM, skypilot2005 wrote:

    On June 24, 2011, at 7:39 AM, devoish wrote:

    "TMFBigFrog

    You have come out against the CFPB, suggesting it is unneccessary protection for consumers.

    Would you review your credit card agreement and confirm for us whether or not you can have your CC interest rate raised on pre-existing balances in the event your phone company makes a billing error and claims you have not paid?

    In the event it is possible can you describe what the penaltys are, and what the interest rate goes up to?

    Could you also share the page/pages that contain that language and help us all know what to look for so that we may all choose CC agreements that do not allow such a practice?

    And just for giggles, would you describe the time and process of discovering these paragraphs?

    Thank you and best wishes,

    Steven"

    Steven,

    Do we need another $340 million per year agency to accomplish this?

    see my post at 6:44 am, above.

    Sky Pilot

  • Report this Comment On June 24, 2011, at 8:19 AM, skypilot2005 wrote:

    June 24, 2011, at 7:35 AM, TMFDRadovsky wrote:

    “That fee can be looked at as interest on the loan that the bank just made.”

    This is a false premise.

    In the State I live in, it is against the law to present a check for over $100 that does not have the funds on deposit available to pay it in the account. When requested, the State Police will collect those funds or cite the person that wrote it.

    It is technically illegal and is NOT a loan.

    I would like you to try telling the State Police Trooper and subsequently the Judge you appear before, that it is a loan.

    Your statement has no basis in fact.

    Fool On.

    Sky Pilot

  • Report this Comment On June 24, 2011, at 8:38 AM, skypilot2005 wrote:

    re:On June 24, 2011, at 7:35 AM, TMFDRadovsky wrote:

    Follow up:

    Let me help you.

    They are paying the funds as a courtesy or because you have made a previous arrangement. Ie: overdraft protection.

    A proper analogy would be the cost of overdraft protection. Even with your demonstrated limited mastery of the subject a cursory check will reveal that there are no or minimal fees for this service.

    Sky Pilot

  • Report this Comment On June 24, 2011, at 11:18 AM, mcampbell8 wrote:

    If you really want to talk about unintended consequences, consider the following:

    Banks get access to easy cash at extremely low rates and feel no obligation to make loans to businesses in order to make a profit.

    Glass-Steagall Act repealed and investment and commercial banking assets are mixed and put into speculative products and a 2nd depression is happens. This is a factor in the issue.

    Mortgage companies and banks push subprime loans because they are more profitable while ignoring the higher default rates.

    Credit agencies rate these vehicles as the highest quality investment grade possible, so investors believe these are safe places to put their investment dollars. Then in court they claim these are only their opinions and as such they are protected under the first amendment and they shouldn’t be held liable for any losses as result of their opinions being wrong.

    Financial institutions charge excessive fees for services and pull billions from the economy for bonuses and such that would typically go for real services and products.

    Hedge funds and other speculators bet on the success and failure of companies, currencies, commodities and take positions that help to fulfill their positions. Supply and demand driven prices go out the window and many aspects of multiple markets are negatively impacted.

    Financial corporations create new liability products that allow them to pass on the default risks to others, all in the name of avoiding capital requirements and the quest for higher profits. Naturally the buck has been passed and the concern for any problems lies with the buyer. These instruments are valued at amounts that are bigger than the assets, revenue of companies and governments. In fact, you can have the same risks sold for 20 or 30 or 40 times and maximize the toxicity of the products to the point that they can destroy whole economies or corporations who take on the risks. And it’s not regulated too. What’s the worst thing that could happen?

    There should be reasonable regulations for capital requirements for banks and financial companies. They shouldn’t be allowed to avoid this requirement, period. Additionally, they shouldn’t be able to bundle and sell liabilities to other investors. They lose all incentive to ensure the product is actually safe and doesn’t pose a risk to their bottom line. And selling their liabilities contaminates the entire system and sets the stage for a massive financial collapse. They laugh and chant the mantra, let the buyer beware.

    You simply can’t allow any company to create products that have the potential to not only destroy a company, but also destroy an economy or interconnected economies. It only takes one toxic product, spread far enough into the system to bring the whole thing down. I’m laughing, the financial companies that were on the brink as a result of these things, doesn’t want the system changed. They have successfully pushed off the liabilities to others and the taxpayers and they are getting access to cheap money. What’s the real risk to them? None, they run the Fed and the Treasury, they purchased the politicians, they paint dire warnings of the world coming to an end, if we don’t bail them out or continue to allow them to access funding for next to nothing. What are the unintended consequences if we allow this system to continue?

  • Report this Comment On June 24, 2011, at 12:47 PM, SpaceVegetable wrote:

    I agree witht his article. Yes, there were predatory lenders, but there were also plenty of greedy borrowers who were equally at fault in this crisis. Over-regulation is simply going to make it more difficult and expensive for those of us who have common sense and are responsible borrowers.

    Look at what happened with the CPSIA. That had unintended consequences that had a hugely negative effect on small businesses. You need to draw the line somewhere when it comes to protecting people from their own stupidity and we seem to be going to far. People learn nothing when protected too much from the consequences of their actions.

    Yes, we need some regulation, but you can't legislate common sense. Demonizing only the lenders in the crisis does everyone a disservice. I always cringe when I see the word "fairness" cropping up in financial discussions. It's usually wielded by those who want to blame others for their misfortunes or take from someone other than themselves to make up for some deficit on their own part. The problem is that fairness is subjective. What's fair to you is unfair to me. It's not the government's duty to make life "fair". We have equal opportunity in this country, and that includes the opportunity to screw up. Sure, the government can help people avoid mistakes, but it goes too far when it tries to shift the blame in the name of "fairness."

  • Report this Comment On June 24, 2011, at 1:43 PM, smokyfied wrote:

    The analogy to Prohibition is very weak. Would regulations intended to ensure the quality of liquor had the horrific unintended consequences that Prohibition did? No. And the new legislation is not intended to prohibit credit, just to make sure that any harmful ingredients (sneaky fees or penalties hidden in the fine print, for example) are disclosed. Businesses today seem to thrive on screwing the consumer with "gotcha" clauses in the fine print. Have you ever read your cellphone, satellite TV or credit card agreement in full? Does anyone? What about your mortgage? Many years ago, fresh out of college, I took my first professional job as an auditor and shortly thereafter bought my first home. I went to the closing and was horrified at the stack of paper filled with dense legalese requiring multiple signatures. How could anyone possibly read and understand all that? Thank goodness I got an FHA loan and not some sub-prime loan filled with tricks and trap-doors. Standardized contracts help to create efficient markets - that is why every major stock exchange and commodity exchange operates on standardized contracts.

  • Report this Comment On June 24, 2011, at 4:25 PM, fppjr wrote:

    Ever since the barter system went by the wayside by the creation of money there have been financial crises, and those created by the people who control the money. The people who control the money eventually get ambitious to get more money so create a bargain, called speculation. People are encouraged to use only a portion of their money, called leverage, to take advantage; but, then the propaganda begins to take larger portions of the speculative enterprise. Next the turnover of the product becomes so massive that no one controls it.

    That scares the money people so they tighten the money supply so they don’t lose anything; but, the speculators are at the controller’s mercy because now everyone is required to deal with no leverage. But, how do you come up with the money to cover your speculation that you were told was a good idea, when there is no one to lend you that money, or, even allow you to change the terms of what money you owe?

    You can’t, so that is why bankruptcy was created so you lose everything you spent your life building to those people who control the money.

    Now, that should get people to know why the control of the money by the government is important and those controls were put into the Constitution of the United States; but, were covertly removed to the Federal Reserve Bank in 1913.

    Finally, SPECULATION is the life blood of people who want more than they think others have; that is called greed. Speculation does not help an economy to keep its equilibrium. History has proved that ever since money was created. And, the money people never go broke because the governments keep giving them a guarantee.

    THE POINT: MAKE EVERYONE DEAL IN CASH OR NO LEVERAGE AND STOP SPECULATION. Also, change the entire U. S. taxing system, where there are no property taxes, no personal income taxes, modify the IRS system, and implement an expansion of the Federal Sales tax system, and the State’s sales tax systems. And, get rid of the Federal Reserve Act, and enforce the Sherman Anti-trust Act.

  • Report this Comment On June 24, 2011, at 4:29 PM, skypilot2005 wrote:

    On June 24, 2011, at 11:18 AM, mcampbell8 wrote:

    "What are the unintended consequences if we allow this system to continue?"

    Familiarize your self with the responsibilities of the CFPB. They will have nothing to do with most of what you are stating.

    Sky Pilot

  • Report this Comment On June 24, 2011, at 5:00 PM, donkatfun wrote:

    I've always bought used cars which have provided me reliable transportation. I bought an affordable house to keep the rain, wind and sun off me and mine, which is after all what a house is for. I don't buy un-nessecary things I can't pay cash for because if I can't pay cash I can't pay cash + interest. I've taken out loans and repaid them with no problems of any sort. I read the loan papers and made calculations to see if I could pay or not. Of course I knew the answer before I went for the loan so I couldn't be talked into something I'd regret. Sooner or later we all have to take responsability for what we do, which in this day and age is almost unheard of. I don't need someone to take responsability for me!

  • Report this Comment On June 24, 2011, at 11:01 PM, ershler wrote:

    fppjr,

    I've never paid property tax to the federal government, am I missing something.

  • Report this Comment On June 24, 2011, at 11:12 PM, mcampbell8 wrote:

    Mortgage companies and bankers are the gate keepers for the financial mortgage system. They ensured that people have reasonable income levels, limited debt and could afford the loans they were getting. The default rate was low, so they were making decent and sustainable profits. But somewhere along the way they went for the higher profits of sub-prime loans and loosened the standards so anyone, even a homeless person could qualify for a loan. It's my contention that they both are responsible. But the gate keeper bears the greater responsibility if he wants to see his loan repaid at a profit to the institution. Providing loans to people who couldn't afford them is a ticking time bomb. That's why they bundled them with good loans to hide their bad decisions and to protect their profits. If they were required to hold onto the loans for a period of time, and suffer the loss for bad decisions, they would have enforced the standards that historically worked. 25% responsibility for the person who signs up for a loan they can't afford and 75% for the loan officer who signs off on the bad deal. The gate keepers control all of the cards. They always have and always will. Can you really imagine the chaos if it was any other way?

    The majority of the industry is good, has ethics and applies decent standards to meet the needs of the people and the businesses that come to them for loans. And they are good stewards who protect their companies and make a decent profit in the process. It’s just a few big, bad apples that strive to invent new things that give them an advantage and expose everyone else to very dangerous products. Even the brightest of us can’t always figure out the products they put in front of us. It was a great source of revenue, looked like our exposure to default was extremely low. But that one or two percent possibility became a reality and now the company will have to sell all of its assets to meet its obligations. These products maximize profits on one end and they also maximize pain on the other end. No one in their right mind would jump into bed with these products if they fully understood the risk they were exposed to. But the right words, the right dressing, the right sleight of hand can make the worst situation seem like a golden opportunity with more upside then down.

  • Report this Comment On June 24, 2011, at 11:48 PM, skypilot2005 wrote:

    On June 24, 2011, at 11:12 PM, mcampbell8 wrote

    "These products maximize profits on one end and they also maximize pain on the other end. No one in their right mind would jump into bed with these products if they fully understood the risk they were exposed to. But the right words, the right dressing, the right sleight of hand can make the worst situation seem like a golden opportunity with more upside then down."

    How about giving us a specific example of one of those "products" and the name of a regulated financial institution that was using them?

    Sky Pilot

  • Report this Comment On June 24, 2011, at 11:56 PM, skypilot2005 wrote:

    This appeared in today's WSJ in the Letters To The Editor section:

    "Prof. Blinder fails to address a much more insidious issue of an increase in government spending: more government. He makes defensible points on crowding out, interest rates and short-term job creation and misses the incentives that bureaucrats have of maintaining their new jobs by increasing regulation.

    Rich Miller

    Broadview Heights, Ohio"

    I feel it is relevant to our discussion, here.

    Sky Pilot

  • Report this Comment On June 25, 2011, at 9:31 AM, Pilot2012 wrote:

    Aren't Fanny Mae and Freddy still making the same stupid loans they did that helped get us into this mess ? Obama has designed this on purpose to crash this country ! One may have said his first errors were just that errors but after dozens of stupid gaffs I don't like so. The 2012 election in 2012 will be the most important election in our lifetimes ! If one wants to buy a house great except banks won't lend to anyone with less than perfect credit 750 score or higher.(20% down helps) Interest rates are great but to qualify you have to pledge your firstborn son !

    Vote in 2012 to remove the Czars and more importantly Obama and insist a term limit bill be passed ! Let's clear house on both sides of the isles and most importantly get some sanity back to Washington DC !

  • Report this Comment On June 25, 2011, at 6:39 PM, Roxx wrote:

    Just for clarification, bundling "good loans" with "bad" loans (I assume you mean Prime with Alt A for example) was an assessment of the mitigation of risk. It was a theoretical combination done by a computer and seemed like a good idea at the time.

    No one thought the whole kit and kaboodle could possibly all go to hell in a handbasket at the same time. What they apparently forgot was Panic. The old fashioned Run on the Bank. When people Run on the Bank, they dont want to hear that the bank is sound or that their money is safe. They just want it right then and there. And of course there is no bank that has everybody money right there at the same time.

    If people lose confidence, it brings down the whole house of cards. And nothing they have done since or will do will arguably will ever make that any different. The CFTC is nothing more than another expensive attempt to bring confidence back. And considering that the Securitization market, the housing market, the banking system, ad nauseum are all still not working properly, the CFTC is a gigantic waste of time.

    But it does give some friends pretty well paying jobs.

  • Report this Comment On June 25, 2011, at 6:58 PM, Risky88 wrote:

    if a bank has to tighten its lending standards becuase they said so to not be unfair and deceptive. thats pretty much the point of AVOIDING a crisis

    good loans not stupid ones

  • Report this Comment On June 26, 2011, at 1:28 AM, deafdog1 wrote:

    does anyone really think the govt is capable of running any program effeciently, effectively and profitably?

    AMTRAC, SOCIAL SECURITY, POST OFFICE, FANNIE, FREDDIE (+341 OTHER GSE's), MEDICARE, MEDICAID, TARP, CASH FOR CLUNKERS, SHOVEL READY PROJECTS,

    .

    Politicians and the agencies they create are like babies...need to changed often, and for the same reason!

  • Report this Comment On June 28, 2011, at 8:23 PM, mcampbell8 wrote:

    Skypilot,

    Are you serious? You want some examples? How about these:

    Abacus CDO

    CDS - how many companies have been burned by this one?

    MBS with sub prime loans

    Sub prime loans

    Just look at the types of investments that were at the heart of the crisis if you need a few more examples.

    Deafdog -- you are right. There isn't much that the government can do well. So a smaller more focused government would serve the country better. But that doesn't eliminate the need for good, reasonable, limited regulations in the market place. It just means the government shouldn't be allowed to become a burden to people or businesses. Crooks will always see any level or regulation as a burden.

  • Report this Comment On June 28, 2011, at 8:23 PM, Texmarke wrote:

    I have been a mortgage broker, a stock broker, involved in mega-bank operations and mega-brokerage operations owned by mega-banks. I have degrees in finance and paralegal studies and have an MBA. Yet I never really understood the contemporary American finance industry until I real a book called "The Creature From Jeykll Island". And then another book called "The Road to Serfdom". It all makes sense now.

    This whole business of CFPB and TBTF and TARP and repeal of the Glass-Stegall Act, and for that matter, all of the other nonsense that has gone on for the last 100 years or so can be traced back to the creation of the Federal Reserve in 1913 by an elite group of international bankers and financiers who had gladly jumped in bed with willing American Progressives in government who saw an opportunity to advance their ideology. An ideology that was paralell to everything our Founders detested.

    The CFPB does not address the problem. As usual, with litterally all other contemporary government programs, it addresses the symptoms without solving the problems; for political gain. The instant problems are Fannie Mae and Freddie Mac: and the directives and guarantees they were accorded by the (progressive) American government... at taxpayer expense. That was not addressed. As a matter of fact, it was conveniently not mentioned. It was replaced with propaganda. Some applesauce about helping the poor and the "victims" of the recent "financial meltdown". Horsefeathers.

    The CFPB is just another Executive level entity that is attempting to usurp the U. S. Constitution and the American people with a lot of hooey. I don't need protection from myself from Uncle Sam, I don't need protection of political elites who manipulate markets at my expense from Uncle Sam; I don't need to be told when to go to the bathroom and I don't need to be told who to like or dislike. What I need is a market that is unfettered by government and a monetary system that is not proscribed by politics.

  • Report this Comment On June 28, 2011, at 8:34 PM, mcampbell8 wrote:

    Texmarke - are you advocating an anything goes market? No rules, no regulations? Getting rid of the Fed would be a nice thing. But you still need some modest rules to ensure the integrity of the market and the elimination of manipulation. If you support an only "Let the buyer beware" approach, then mega corporations and monopolies will take over the markets again to the detriment of everyone. And all tactics they employ are open in a completely open market. You need good rules to ensure fair and free competition. Otherwise some would just buy up competition and lock down the market and charge any price they want. Please tell me I am a bone head and you disavow any knowledge of my perspective on your comments?

  • Report this Comment On June 29, 2011, at 8:33 AM, Texmarke wrote:

    @mcampbell8: No, I am not advocating an 'anything goes' market. Of course there needs to be some ground rules... like stop signs at intersections on the roadways that are universally recognized. What I find unacceptable is the collusion between big bankers and unelected big government regulators which facilitates a political agenda that most Americans in the private sector don't want. Think about this: Fannie Mae and Freddie Mac were used as tools of the Clinton Administration to 'increase homeownership in the U. S.' by a certain percentage, which was accomplished by relaxing bank lending regulations and borrower minimum loan requirements via collusion between regulators and Fannie Mae and Freddie Mac, who guaranteed the loans with taxpayer money. This is where the manipulation of the market started a 'bubble'. Why? So the Democrats could boast about helping poor Americans into homeownership; a vote getter. Then the Bush Administration, with its agenda, looked the other way and did nothing to stop the bubble. Everyone was just making too much money, especially when the investment banks began to securitize these less than optimum mortgages and then bet against their own customers in at least one case (which tells me that they knew the danger and just kept on going because they were protected by government guarantees on the loans). Then, in 2008, the bottom fell out, the bubble burst. And, in short, taxpayers paid the bill for the recklessness of the bankers and the politicions via TARP's and the TBTF propaganda which was another manipulation not only of the markets again, but of the people as well. Now ask yourself this: what did the regulators do about all the glaringly obvious fraud and deceit perpetrated by the banks? Answer: not a damn thing. As a matter of fact, the head of one GSE was promoted to a Cabinet position in charge of, guess what, the Treasury. And the investment bankers? Well, not only was there never even one CEO brought up on any charge of wrongdoing, the average investment bank CEO bonus in 2009, if memory serves, was in the neighborhood of $50 million, when most of the U. S. was in the depths of the worst recession (depression) since 1929. Why? Because the upper management, lobbists, and attorneys of the investment banks interchange regularly with the DOJ and the SEC while the Administration looks the other way. So, in effect, there is no meaningful regulation right now. It's an 'anything goes' market. And we, the taxpayers, have paid, and continue to pay, the price. I couldn't agree wih you more that we "need good rules to ensure fair and free competition". Right now, there aren't any.

  • Report this Comment On June 29, 2011, at 6:52 PM, hampyonce wrote:

    The banks already have the Loan Sharks in place. Payday Lenders. Overdraft fees. Blah blah blah. More rules simply make the game harder to understand, not easier. This effort to help will fail miserably. Government has never solved any instance of one party taking advantage of another without taking advantage of someone else. The fact that we can't simply let people who take retarded risks suffer their own consequences is the problem. MBS's were supposed to diversify the risk but we bailed the investors out anyhow. We have cake, we eat cake too.

  • Report this Comment On June 29, 2011, at 8:10 PM, interdependent wrote:

    Government is not something we can live without.

    A free market with no rules means chaos. The economy would come crashing down regularly in cycles. Yes, worse than it has been crashing. Our financial institutions became strong because of our rules, because they were reliable.

    "Of the people by the people for the people" means us. We -- you and I -- have to do better. Let's stop complaining about bureaucrats or about greedy CEOs. We're complaining about ourselves. We're not so different, you and I. We need to help each other do better.

    Yes, "government help" invokes the inevitable reckoning of the Law of Unintended Consequences. I believe in the need to respond to the Unintended Consequences once they appear, almost as much as I believe in what will inevitably happen when "good men do nothing."

    TO say we can not make the world better is to deny history.

    TO say we need to deregulate the market is to embrace chaos and destruction.

    TO say the government will get it right this time is stand-up comedy.

    We can only continue the conversation. We must listen and learn and speak up to make our financial institutions stronger to better serve our country -- the fundamental purpose of banks, lenders, brokers -- as we crowd our planet with more people and goods and we all become more interdependent.

    The markets and financial institutions are groaning under the weight of their own success, their sheer enormity, and we will all suffer when they fail.

    Do you believe government should try to help?

    Do you believe the markets will sort themselves out?

    How you answer that will determine the way "logic" flows and you create arguments and find evidence to prove that you were right.

    Take out the words 'government' and 'market'.

    Do you believe "people" should try to help?

    Do you believe "people" will sort themselves out?

    I believe we've got to try to regulate financial institutions that use our collective wealth with enough power to easily manipulate our powerful government and in so doing orchestrate their own demise, at our own expense.

  • Report this Comment On June 29, 2011, at 9:12 PM, mcampbell8 wrote:

    Well said Texmarke. The new rules don't really address the heart of the issues and the bankers got off scottfree.

    Wall Street and the government should never mix. This inbreeding will be the ruin of us all. The sole purpose of the Fed is to protect the banks, not the people. We need good old fashioned accountants running the Fed and Treasury to clean out the sad state of affairs that exist.

    As long as the government listens more to the power brokers in the financial sector, we are doomed. Yes independent, they won't get it right this time either. But it is a small step in the right direction. We need good business people running the government, not politicians and the influence from every special interest with a checkbook.

  • Report this Comment On June 29, 2011, at 11:43 PM, mcampbell8 wrote:

    Skypilot,

    I have to ask one question. Do you know that the big banks helped Greece and other nations borrow massive amounts of money and hide their true financial state? They effectively covered up the mess and painted a rosy picture when the house was burning down for Greece. Yet they won't be punished for their involvement. Reminds me of the great ratings the MBS got from the big 3 rating agencies. Nothing but lies, distortions and the absence of truth. Now the hen has come home to roost for Greece.

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