I think this will make it a pandering system that redistributes wealth via the pretext of fairness, creating barriers of entry to various business lines that end up subsidizing business practices that payoff various special interests. That is, regulatory capture works by making the redistribution conspicuous and welcomed by industry, who accept this for being able to keep outcompetitors via 'suitability' requirements such as whether agents are sufficiently licensed, or firms have sufficient oversight to provide check cashing services.
In a democracy there is a strong desire for redistribution. This comes merely from the masses voting to take money from the rich, who are relatively few, and appropriating this to the more numerous masses (who wouldn't vote for Bill Gates giving them each a $100 check? He could afford it, and still be a billionaire!). One can argue that inegalitarian distributions are bad for several reasons: because inequality causes civil unrest; it causes a glut of savings; the market is crooked anyway, or a Rawlsian argument that market value is the result of arbitrary power and preferences that have nothing to do with one's 'true worth'. I think it's more honest to say people are envious, and as inequality generates a pyramid with a relative few at the top, this is not resilient to coalitions of those more numerous on the bottom. Pathetic, but such is the crooked timber of humanity.
Thus regulators invariably seek two goals that are often at direct opposition. The desire to increase efficiency via ensuring people follow the rules (basically, adding criminal punishment to that of the market for lying, cheating and stealing). Then there is the desire to reduce poverty, or equalize outcomes between various ethnic and racial groups.
Interestingly, economists have long noted that redistribution is best done in simple lump-sum payments. Say you want Hmong to do 'better'. Well, instead of having vague guidelines larded in various activities (education, police force hiring, mortgage lending), it is better to given every Hmong a check for $X each year, and let the market deal with education, police force hiring, and mortgage lending. It creates less deadweight loss via all those subtle, tendentious biases.
Grutter v. Bollinger case found it illegal to give blacks extra points in their standardized scores for law school, but did allow schools to apply affirmative action via less obvious measures. Michael Kinsley noted that this simply makes preferential treatment less efficient and less honest:
The court actually seems to be in denial on this point. Although it forbids explicit racial quotas or mathematical formulas to achieve racial balance, it is happy enough to measure the success of its preferred fuzzier approaches in statistical terms. If a selection system is going to be judged by its success in approximating the results of a mathematical formula, how is it any different from using that formula explicitly? ... And if [discrimination] can be measured and judged using statistics, why is it wrong to achieve the statistical goal through statistical means?That's a deadweight loss argument, that disingenuous redistribution is worse than explicit redistribution.
The problem is that laying bare the redistribution by race violates title 7 of the Civil Rights Act, and seems unfair to many, mainly to those at the lower tail of the presumed hegemonic group.
In the recent New England firefighters case, Supreme Court justice Antonin Scalia noted that eventually the congress needs to address the patent inconsistency within Title VII of the 1964 Civil Rights Act, which prohibits discrimination by covered employers on the basis of race, color, religion, sex or national origin. In Griggs v. Duke Power (1973) the Court found that under Title VII, if employment tests disparately impact ethnic minority groups, businesses must demonstrate that such tests are "reasonably related" to the job for which the test is required. This latter point is very difficult to prove in practice, which is why federal civil service exams got rid of standardized tests in 1981. So Title 7 contains a requirement that firms do not discriminate ex ante or ex post, in treatment or in effect. Notes Scalia:
the Court will have to confront the question: Whether, or to what extent, are the disparate-impact provisions of Title VII of the Civil Rights Act of 1964 consistent with the Constitution’s guarantee of equal protection?
You can't have equal treatment and equal outcomes, because lending inherently involves discriminating based on ability and willingness to pay, which is not distributed according to our preferences as to how the world should be. Finance is highly regulated, and many regulations are targeted towards treating people 'fairly', which mainly means redistributing outcomes towards politically powerful but economically marginal groups. As many advocates target 'the poor' directly, this leads to really bizarre stances, such as HUD advocating reworking a 125% Loan-to-Value mortgage while the OCC monitors leverage ratios of small business loans; simultaneously telling banks to increase their capital and also to loan more, etc. You can't advocate banks serve poor groups as well as the rich without messing up everything. It's like trying to fatten up the slower fish at the bottom of the tank—the big fast guys are going to burst before these poor souls get fatter.
I doubt this inconsistency will be resolved any time soon, but it's the congenital clusterpuck of financial regulation. In a democracy, policy makers exhibit the precise amount of hypocrisy demanded of them—no one campaigns with equal emphasis on increasing (or decreasing) spending & taxes. This comes at a cost, and listening to all these great new initiatives to help poor people via preventing foreclosures, or not raising their interest rates, creates a myriad of responses that in the end just make the system less efficient, which means it has less wealth. In an economy with mass immigration from the third-world, means less income for the unskilled.
At least these problems are made in good-faith.
"One can argue that inegalitarian distributions are bad for several reasons..."
the problem is not inequality of income or wealth, it's inequality of opportunity. symptom and cause.
it is better to given every Hmong a check for $X I dont know about the Hmong, but people with experience in charity work would never do that.
Regarding the horrible clusterfuck caused by well-meant regulation in the banking industry, it is nothing what regulation has done to manufacturing. There must be a word to describe it, but I dont know it.
J: are you referring to disincentive effects? I think these are just more obvious when youu give someone $10k. When you do this implicitly through several independent preferences, it is worse.
per distribution of opportunities, that's a good other reason.
I don't think that democracy, redistribution, and New Haven firefighters have much to do with to the merits of a CFPA.
One of the assumptions behind the CFPA is that clearer contracts would tone down certain quasi-fraudulent abuses (e.g. prime borrowers being put into subprime mortgages, thus paying an unnecessarily high interest rate, the assumption being they were somehow prevented from shopping around). It's redistributionist in the same way that voiding fraudulent transactions is redistributionist (from the con man to the mark). Enforcing contracts is also redistributionist (from the breacher to the counterparty), and this doesn't even require regulators (or are you against judges and contracts as well?).
A better argument would be to look at the various state regulations (e.g. of credit cards and payday loans) to see whether consumer financial contract regulations on clarity of contracts have much (or any) impact on reducing sharp practice (however this is defined). Some sort of costing would be useful, e.g. it only costs $0.10 of regulators to save $10 of dodginess.
I haven't managed to care about the issue just yet, but I think both sides could improve the quality of their arguments.
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