2009 November 27 Friday
Regulations To Protect Finances Of Ignorant Masses?

Felix Salmon thinks we need a regulatory agency to protect the ignorant masses from their financial literacy.

John Carney is right: a very large number of Americans is always going to be financially illiterate, and thereís nothing we can do about it.

More than half (and a growing proportion) of the American public have IQs below 100. But even an IQ of 100 isn't enough to understand how to buy stocks or what's a good mortgage.

Indeed, if we try too hard to do something about improving financial literacy, thereís a good chance weíll only end up creating a new cohort of overconfident financial illiterates who think they understand things when they donít.

This is why we need a Consumer Financial Protection Agency: to make sure that people buying financial products donít end up buying something thatís going to end up exploding in their face.

During the era of Protestant ascendancy this might have worked. But the WASPs do not run things any more. Nowadays the supposedly pro-regulatory Democrats in Congress support usury. The government isn't capable of benign paternalism. A regulatory agency for consumer finance would likely be captured by the brain dead pro-diversity forces of political correctness. How can a regulatory agency protect people from loans they shouldn't take out when sensible regulations that provide useful protection would have "disparate impact" on NAMs? (i.e. a greater reduction in loans to minorities that have higher rates of defaults)

We have a cancer of know-nothing political correctness eating away at our ability to form rational government policies and that cancer is infecting more and more areas of policy.

Share |      By Randall Parker at 2009 November 27 06:11 PM  Economics Financial Regulation


Comments
Chunk said at November 28, 2009 10:22 AM:

wonderful! so even us progressives are being sold out by our party, the same way the conservatives have been all along!

even if it's not a matter of IQ, it's still wrong to let someone profit off of someone else just because they make poor decisions... why we've let them do this for so long just completely baffles me. Gah, but this is a stupid argument because for obvious reasons.

blegh. I chose the wrong time to become a liberal.

Bob Badour said at November 28, 2009 11:11 AM:

Chunk,

Your last comment reminds me of Lloyd Bridges in Airplane.

MaryJ said at November 28, 2009 12:20 PM:

Chunk, My credit card company raised my rate to 30 percent even though I've been a customer for almost 20 years and have an excellent credit rating. The reason is that I lost my payment coupon one month and was too lazy to call the company and ask for another, so missed a single payment. Needless to say, I paid off my balance with that company immediately.

Bob Badour said at November 28, 2009 2:08 PM:

And I am sure they were very happy to have all their money back so easily and so quickly.

Michael L said at November 28, 2009 2:32 PM:

to the extent that the "protection" can be accomplished by preaching the gospel of "it's bad idea to stick your fingers into the financial electrical outlet" to the masses, you don't need the government to do it. You could do it yourself, with assistance from like-minded WASPs. In other words, if lack of IQ and/or understanding is causing trouble for many individuals negotiating a mortgage/investing/etc, a competent non-profit (or even for-profit, who cares) could bring higher intelligence/understanding/savvy along with PR/propaganda/marketing skills to bear to explain to them at least those essential basics that you think that high IQ people understand fully about the financial issues.

Obviously a private organization short of the Cosa Nostra would not be able to prevent banks from changing credit card rates arbitrarily or, for that matter, save people who don't want to be saved. But it still would be better than nothing. Indeed, there are probably already plenty of such organizations - I would guess they just aren't doing a good job with the preaching. Perhaps an IQ problem as well, it's not like the best and brightest went to work in non-profits in times of prosperity... But still, this seems to me a much more meaningful direction for thought and effort than bashing the evil non-WASPs, diversicrats etc. Some things cannot be changed, but others we can and should try fixing.

Clarium said at November 28, 2009 2:33 PM:

"The government isn't capable of benign paternalism."

The US cannot be socialist.

Beign paternalism is Swedish socialism (actually it is beign maternalism.)

Randall Parker said at November 28, 2009 5:35 PM:

Clarium,

Yes, Swedish socialism is not benign paternalism.

MaryJ said at November 28, 2009 7:00 PM:

Michael L, I don't know that it's a matter of low IQ. I remember when the banks started to fail last year and I had quite a lot of cash in one of the worst ones. I told my boss at the time that I was worried about losing it. My boss (an MBA from a very decent college) said, "Don't worry, it's insured by the FDIC." I said, "What if the FDIC fails?" and he looked at me like I was a moron. This week an article came out which said that the FDIC was billions in the red.

MaryJ said at November 28, 2009 7:01 PM:

Michael L, I don't know that it's a matter of low IQ. I remember when the banks started to fail last year and I had quite a lot of cash in one of the worst ones. I told my boss at the time that I was worried about losing it. My boss (an MBA from a very decent college) said, "Don't worry, it's insured by the FDIC." I said, "What if the FDIC fails?" and he looked at me like I was a moron. This week an article came out which said that the FDIC was billions in the red.

Mercer said at November 28, 2009 7:48 PM:

"an IQ of 100 isn't enough to understand how to buy stocks or what's a good mortgage."

I disagree with the premise that poor financial decisions are the result of low IQ or lack of financial education.

Ten years ago many people who were smart and financial knowledgeable were buying tech stocks from companies that had never earned a profit and had no realistic plan to become profitable. You don't have to be a Warren Buffet to know that putting most of your money in stocks that had never earned a profit doesn't make sense. People bought them anyway because they thought it was a chance to get rich.

Edmund Andrews, one of the NY times economics reporters, has written a book detailing how he bought a house he couldn't afford. I think Andrews has an IQ over a 100 and more financial knowledge than most people. He wanted to please his new wife and keep up with the Joneses.

People make bad financial decisions because greed and/or the striving for social status overpowers rational decision making.

Randall Parker said at November 28, 2009 8:08 PM:

Mercer,

Add a low IQ to striving for higher status and the potential damage is much greater.

Impulsive decisions for major purchases and loans result in bad decisions. Low IQs increase impulsivity and therefore bad decision-making. Low IQs also mean people are less able to make sense of the information available to them.

You can still be a smart fool too. But dumb fools are more common.

Stephen said at November 29, 2009 1:52 AM:

I wonder if the complexity of the world is increasing faster than IQ. Is it harder for a person in the middle of the bell curve to make a sensible decision now than it was 100 years ago?

Randall Parker said at November 29, 2009 5:54 AM:

Stephen,

Certainly farmers who had to save enough crops to make it thru the winter and until the next harvest could picture what they were doing and knew the risks. It was all physically in front of them. Contrast that with saving today. How to save? We look at interest rates at banks, municipal bonds, corporate bonds. How to evaluate the risks? Oh, and your interest is taxed. What's your marginal tax rate. Gotta do some math. Gotta know some tax law.

I've advocated people spend their money on home insulation, a hybrid car and other tangible ways to cut long term costs precisely because these decisions are easier to understand and more sure in their beneficial effects. Though even with these choices there are unknowns. How much will each type of insulation reduce heat loss? How to lower the A/C bill?

Michael L said at November 29, 2009 8:02 PM:

MaryJ, I don't necessarily personally believe that the problem boils down to low IQ. My comment above is really more of a response to Randall's comment. In some sense, you could say, since there are already various smart counseling organizations and they don't have much effect, the IQ is not a panacea. Or maybe they are doing it wrong. Or maybe both...


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