Wednesday, September 30, 2009

Sorry. No Vanilla.

One facet of the response to the financial crisis is the possible creation of a Consumer Financial Protection Agency. An agency which, among other things, would promote plain-vanilla contracts. Professor Elizabeth Warren describes them this way:
The Agency will promote plain vanilla contracts—short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure—it’s just a way to hide more tricks.
It's easy to say that people shouldn't enter in to contracts and agree to terms that they don't understand, but that is totally unrealistic in today's legalistic atmosphere. I would bet that the vast majority of Americans do not understand the terms of their mortgage or credit cards well enough to explain them to you. I don't mean the people that get in over their heads, I am talking about smart, sophisticated people that just happen to not be lawyers.

I also don't mean the basic terms of these contracts like the payment due date, interest rate, and monthly payment (though certainly there are some people who can't explain these either). I mean the gnarly terms hidden on page 17 of the disclosure you get that is single-spaced in 6-point font on a piece of rice paper folded to look like one page, but is in fact about twenty. You know, things like universal default.

While I certainly don't believe that all problems have simple solutions, this idea of plain vanilla appealed to me.

Opposition to this simple solution has been a bipartisan affair and has apparently succeeded in killing it.

Mike Konczal at Rorty Bomb has posted his lament over the loss of the vanilla option and includes this:
Rather than a creeping socialist plot, the vanilla contract is actually creating the conditions where innovation could flourish, where we could see consumers and markets do what they do best – express choices over what they want to spend their money on, what goods and services they would like to bundle with their default contracts, and have businesses compete to provide those services. Without it, we get “gotcha fees” and people become cynical about what innovations in consumer finance can actually accomplish.
Opponents of the plain vanilla idea claimed it would stifle innovation and drive up costs. As someone who looks to save money wherever he can, I am certainly sensitive to costs; the time required to understand, compare, and avoid so-called innovations that do nothing to benefit me as a consumer also represent a cost. A cost that doesn't appear to be going away anytime soon.


Dad29 said...

It probably occurred to you that the opposition to 'plain vanilla' is precisely the same bunch which opposes the Fair Tax.

Steve said...

Lawyers, realtors, insurance companies, money-lenders in general don't like the flavor of vanilla; it lacks the taste of "free enterprise"; it it smacks too much of the "plain people".