Praise for the CFPB?

by Don Boudreaux on July 18, 2012

in Complexity & Emergence, Hubris and humility, Nanny State, Other People's Money, Regulation

Here’s a complete (from today) blog post from the great Arnold Kling at EconLog; (passages quoted by Arnold are italicized):

CNN money reports,

.

“Cardholders who enrolled in a payment protection or credit monitoring product — or who tried to cancel one of these products but were persuaded by a call center representative to keep it — on or after August 1, 2010, will be refunded the money they paid for the product, as well as any finance charges, over-the-limit fees or interest paid, the CFPB said.

“Capital One will also stop marketing all of these products until it submits a compliance plan that is approved by the CFPB.”

This is a case of a sophisticated financial institution taking advantage of unsophisticated consumers, and I applaud the Consumer Financial Protection Board for doing something about it.

And, no, the CFPB is not an agency that I expected to find myself applauding.

I seldom disagree with Arnold, but I disagree here.

I disagree not with Arnold’s claim that those consumer-credit products hawked by Capital One are useless for the consumer.  Never in my life has it dawned on me actually to purchase such a ridiculous product.  Like Arnold, I’m disgusted by firms that offer such useless products to consumers – and I pity the naive consumers who purchase such products (for only naive consumers purchase such products).

But why should A be obliged to pay for B to protect C from the consequences of C’s naiveté?  We can all agree (indeed, I emphatically do agree) that C is naive, and that D – the party who profits from C’s naiveté – commits an ethical offense in profiting from C’s naiveté.  But does the cost to C of his or her naiveté justify G forcing A to fund B’s efforts to protect C?  The answer to this question is at best not obvious, although to me the answer is “obviously not.”

What metric assures an outside observer that the loss to A – the person forced to pay for B’s intervention on behalf of C – is less than the loss to C of persisting in his or her naiveté?  Because there’s no solid evidence, or strong reason to believe, that A’s losses aren’t at least as great as C’s gains from such government action, the presumption of liberty should keep G and B out of the business of protecting the “C”s of the world from their own naiveté.

Note that it will not do to say that, because the taxpaying “A”s of the world plausibly are much larger in number than are the naive “C”s, the loss that each A suffers in order to finance B’s assistance to the “C”s means that the losses to the “A”s do not weigh heavily enough against the gains to the “C”s.  That argument would justify simply taking money directly from the more-numerous “A”s and transferring it to the less-numerous “C”s – indeed, it would justify such a policy regardless of how astute or naive are the “A”s and “C”s.

There are other reasons for my refusing to join Arnold in applauding this activity of the CFPB – reasons such as, for example: Because the transactions in question are voluntary and among adults, it isn’t anyone else’s business what transpires between A and C.  Would Arnold applaud a DHHS ban on the sale of Big Macs, for it’s quite easy to construct an argument, very much like Arnold’s above, for government to prevent unsophisticated people from buying food that those of us in the know know a sophisticated diner would not buy.  I understand well and sincerely that one might draw out differences between the buying of Big Macs and the buying of credit-card payment-protection plans; the question would be just how compelling those differences turn out to be upon careful reflection.  Why, for example, would government action on the Big Mac front be objectionable nanny-statism while government action on the credit-card front be applause-worthy government intervention?

There are yet other reasons for my refusal to join in Arnold’s applause here, but I’m content now to close this post as is.

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