Treasury Secretary Timothy Geithner addressed the House Financial Services committee today on the need to reform regulation of the financial industry. One key aspect of the new regulation is consumer protection. Geithner remarked,
“Without adequate regulation, American families were enticed to switch credit cards with balance transfer offers at low interest rates of which they could not take advantage if they put gas and groceries on the card. They got mortgages with interest rates that shot up painfully in two years or sometimes less, and which often had increasing loan balances. They got hidden late fees, penalty rates, and prepayment penalties. These risks were disclosed, if at all, in fine print that no reasonable consumer could be expected to see and understand.”
He went on to explain that that tactics such as these were once hailed as financial innovations. These types of innovations are clearly asymmetrical—that is, great for them, bad for us. We are all now aware of other ‘innovations,’ such as bundling risky loans and selling them in bulk to firms who buy them with the intention of doing the exact same thing. These innovations contributed to our economic growth over the past few years, even as American jobs and manufacturing, the bases of real economic growth, moved to China and India.
Critics of financial regulation say, among many other things, that increased regulation will stifle innovation. Over the past year, it has become clear that many innovations are indistinguishable from scams, and these types of innovations should certainly be stifled. There is a valid argument to be made that some financial products help eliminate waste in the financial system and more efficiently bring together lenders and borrowers. But presumably, effective oversight would still allow for this kind of innovation, and perhaps even make it more effective, since well-regulated firms may be able to more easily entice investors who may be wary of new financial products. But even in the worst-case scenario, in which increased regulation significantly reduces efficiency in financial markets, it’s worth considering the alternative, that the cost of optimal efficiency might be economic collapse.
Similar Posts:
- What Causes An Economic Recession?
- Clean Cut Credit Cards – Reforming the System
- AIG Pranks America
- Freedom and License – Latest Efforts by the Chamber of Commerce
- Calvinomics – The Myth That Ovespending Caused the Recession
September 23rd, 2009
Financial regulation is key to preventing this problem from arising again. Don’t get me wrong, there will be future recessions, but if we put the right laws in place the reasons will be different next time. I say we re-institute the Glass-Steagall act. That’s the reason the financial institutions got out of hand and everything collapsed.
September 23rd, 2009
The market will decide what is right and what is not. The whole reason the collapse happened is because there are too many regulations as is.
September 23rd, 2009
Its great to know that were just feeding more and more crap for our kids to worry about. By the time they are in their middle age, they’ll be so far in debt the chinese will own them.
September 24th, 2009
What the hell is with these crazy ass right wingers?