The plain vanilla option for financial competition

Now it's dead, everyone else has been blogging it, and a few readers have been asking me what I think.

On one hand, I believe that many complex financial products are a mix of inefficient shrouding and plain, outright trickery or even fraud.  In this regard I find it easy to see the merits of "plain vanilla" regulation.

On the other hand, I see regulatory agencies as about the least "plain vanilla" institutions out there.  Try looking at the information provided by a regulatory agency and deciding which of its programs are not delivering value for the money.  Are they even trying to explain this to Congress or to the public, much less succeeding?  The regulators present their tasks in complex bundles, topped off with lots of rhetoric about how essential the whole thing is.  Regulators will go to great lengths to make transparent the benefits of what they do, but not the failures or the costs.

So if consumers are tricked into purchasing too many shrouded products in mortgage markets, are they not also tricked into favoring too much shrouded regulation in political markets?

The idea of using regulation to enforce "plain vanilla" offerings to me begs the question.  The pattern of regulation itself won't be…plain vanilla.  Maybe there's a way to get there, but the mere insistence that regulation ought to be done properly I don't find very compelling. 



No, wait, I've got it!

Consumers can be tricked, but not investors, because investors trick both consumers and The Fed because...they're RICH! Market inefficiency, psychology, and mistakes only flow one way. Brilliant!

And since bureaucrats and regulators and politicians are disinterested, altruistic and not psychologically vulnerable, they need the extra power to protect the consumers.

(Guess who that theory would place next on Krugman's list.)

But hey, they seem to be catching on to the nature of the efficient market, and the need for two Americas.

I liked this quote "Bankers don’t necessarily mind, either – after all, they did very well for themselves selling plain vanilla backed by the GSEs."

Political economy plays a dominant role here. The pursestrings and boundaries for these institutions are set by congressional committees (effectively). Consequently a great deal of their efforts will be bent toward offering information to congress or presenting their actions to congress. Occasionally this is spelled out in the mandate for the regulatory body (especially true with smaller regulators). But even if this is not specified a non-trivial amount of time is ploughed into convincing congress that the agency's goals are laudable, that they are making progress on those goals and (crucially) that they haven't achieved those goals yet.

A lot of these agencies are actually improving, but it is still the case that their focus is not on informing the public but on informing congress.

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