Science supports the Consumer Financial Protection Bureau

There are many reasons why Obama and the Democrats were absolutely right to press for a Consumer Financial Protection Bureau (CFPB), billions upon billions of them -- all the dollars that people have lost in the Wall Street-led financial crisis that we've been suffering through since the end of the Bush presidency.

Today I came across a persuasive scientific reason for the CFPB in Daniel Kahneman's "Thinking Fast and Slow." (Kahneman, a psychologist, won the Nobel Prize in Economics for his work on decision making.)

We Homo sapiens aren't Econs; we are Humans.

The distinction between Econs and Humans was made in another book about behavioral economics, "Nudge." Richard Thaler and Cass Sunstein pointed out what should be obvious, but unfortunately isn't, at least to Republicans who oppose protecting consumers from shady financial practices. 

People aren't Spock-like, highly rational, and fact-based in any aspect of their lives, which certainly includes financial decisions. Thalel and Sunstein write:

To prevent future catastrophes, regulators should focus explicitly on how to provide safeguards against two all-too-human frailties explored by decades of work in behavioural economics: bounded rationality and limited self-control.

The standard (non-behavioural) econ­omic model has greatly influenced regulators. In that model, economic agents (econs for short) choose optimally, no matter how hard a problem they face. They play chess as well as they play tic-tac-toe. The problem with this approach is that the world is populated by humans, not econs. Humans are not stupid, but when things get complicated they flounder: they suffer from bounded rationality.

So scientific evidence doesn't support the libertarian, unfettered free market, buyer-beware notion that American citizens don't need any help from the government in protecting themselves from confusing, manipulative, deceptive financial dealings.

Kahneman's book talks a lot about how we use both fast intuitive (System 1) and slow rational (System 2) brain processes when deciding what to do. There are plenty of scientific studies cited by Kahneman which back up these assertions:

Humans, more than Econs, also need protection from others who deliberately exploit their weaknesses -- and especially the quirks of System 1 and the laziness of System 2. Rational agents are assumed to make important decisions carefully, and to use all the information that is provided to them. An Econ will read and understand the fine print of a contract before signing it, but Humans usually do not.

An unscrupulous firm that designs contracts that customers will routinely sign without reading has considerable legal leeway in hiding important information in plain sight. A pernicious implication of the rational-agent model in its extreme form is that customers are assumed to need no protection beyond ensuring that the relevant information is disclosed.

The size of the print and the complexity of the language in the disclosure are not considered relevant -- an Econ knows how to deal with small print when it matters. In contrast, the recommendations of Nudge require firms to offer contracts that are sufficiently simple to be read and understood by Human customers... Humans, unlike Econs, need help to make good decisions, and there are informed and unintrusive ways to provide that help.

The Republican backlash against President Obama's recess appointment of Richard Cordray to head up the Consumer Financial Protection Bureau is absurd. Hopefully there will be an even bigger citizen backlash against the self-serving backlash.

"Self-serving," because Republicans obviously aren't interested in serving the public interest. They're concerned about Wall Street, executives of big financial firms, and other members of the 1% who are big donors to G.O.P. politicians.

Last month we saw Republicans in the House of Representatives dead set against extending a payroll tax cut for the middle class. That turned into a public relations nightmare for them. Now, we see the G.O.P. weeping and crying about -- gasp! -- someone being appointed to lead an agency that will protect consumers against predatory financial institutions.

Next, I suppose, Republicans will come out against puppies and babies. Their usual finely honed political instincts have gone awry, which is great news for Obama and the Democrats. 

Keep it up, G.O.P. Keep on fighting against the 99%. Keep on battling on behalf of financial wheeler-dealers who are out to screw the public. You'll find out next November how this is going to play with voters. 

I predict: not well.

Have a look at the guy who Obama chose to head up the supposedly horrible, evil, malevolent Consumer Financial Protection Bureau. Listen to his two minute description of what he and his agency hope to achieve. Then marvel at the Republican effort to shut down the CFPB.

 

Comments

[DJ]

In Brian's utopian world, science trumps everything.

Brian, shouldn't you be getting back to your duties as Director of Hatcheries and Conditioning?

[Brian Hines]

DJ, science is synonymous, essentially, with facts. Reality. Things as they really are.

How could you call respect for reality a "utopian world"? It's simply THE world, as it is. If politicians don't deal with the real world, their laws will be ineffective.

[DJ]

Spoken like a true Alpha.

[Brian Hines]

Alpha what? To my dog, I'm the biscuit and chew stick dispenser. My wife is the Alpha.

[DJ]

Careful what you reveal here, Brian. Functioning outside your predetermined caste - and with family nonetheless - will mean severe consequences from the World State.

Better get yourself into reconditioning therapy - quick!