squashed:

Regulation, Disclosure, and Tiger Pits

Unsolicited Analysis and I seem to agree that comparing the practices of the credit card industr to hidden tiger pits is a fruitful analogy. The hidden fees and insistence on using every nasty trick they can find to wring a profit out of consumers is pretty vicious. (I should note that by “tiger pit” I meant a hidden pit full of stakes meant to catch tigers. But I think a hidden pit full of stakes AND tigers is probably cooler.)

I see tiger pits as, generally, a bad thing. Unsolicited Analysis sees them as the greatest tool for Social Darwinism since fishing in thunder lightning storm.

There have been a number of regulatory approaches to predatory consumer practices. One approach is the do nothing approach. This approach says that those of us who are exceptionally careful can avoid falling into a tiger pit. If you fall into a tiger pit, it’s your own fault. If people keep digging these pits and filling them with tigers, that’s how the real world works. The suckers get eaten by tigers. We should avoid any attempt to prevent people from falling into tiger pits in high traffic areas because it might have unintended consequences.

Disclosure Statutes

In the United States, our usual approach to tiger pits is a disclosure statute. We don’t want to infringe on anybody’s freedom to dig a pit and fill it with hungry, hungry tigers. But we feel bad for all the people who get eaten by tigers. So we make them disclose that there are tigers in the pit. So we make them put up ”here there be tigers” sign. Or, more likely, we make them put up a sign that says somewhere, probably buried in pages of boilerplate that there are tigers in the pit and that they aren’t responsible for injury or death caused by tiger-related mauling. If it’s still a problem, we say that the disclosure must be sufficiently prominent. So a section of the boilerplate goes in ALL CAPS. “By walking down this path, you acknowledge that the FUN TIME CAKE COMPANY is not responsible for death if you fall in a pit, including but not limited to death caused by falling, impalement, OR BEING EATEN BY A TIGER. The company further disclaims …”

The tiger pit industry lovesdisclosure statutes. Or, rather, they like disclosure statutes a whole lot more than the alternative. Because disclosure statutes say that you can do whatever you want, so long as you tell people what you’re going to do first. And in the credit card industry—if not in the tiger pit industry, those disclosures can be made in a way that people will not understand. What, for example does “0%* APR on purchases” mean? Does it really mean that you don’t need to pay interest? Or does it mean that you don’t need to pay interest if you perfectly follow a very specific set of instructions that aren’t clearly disclosed and are subject to change without notice. A disclosure buried in pages and pages of boilerplate is no disclosure at all. You don’t read the fine print. Nobody does. And we know that nobody does. But when somebody gets bitten by something buried in the fien print, we say, “How negligent. He should have read the fine print.” We feel superior because we’ve been luckier so far.

Disclosure is better than nothing. But a properly constructed disclosure statute should be as clear and as understandable as possible. In this case “understandable” doesn’t mean “decipherable by an attorney.” It means that it delivers the relevant information in a manner a typical consumer can understand. Of course, in finance, there is a fair amount that a typical consumer can’t understand.

Substantive Regulation

The recently passed Financial Reform bill contains actual, substantive regulations. It has some “thou shalt nots” rather than simply “do as you will—but let people know what you’re doing.”

There are valid reasons to be concerned about restrictions on tiger pits. Some people might like tiger pits. Maybe a tiger trainer wants to live on the edge. Maybe tiger pits are awesome in some way we haven’t thought about. But generally, they’re a public nuisance. If we don’t want to ban them entirely, perhaps we can at least keep them out of the public thoroughfares.

I don’t mind laws that severely restrict behavior with no public benefit and significant public costs. And I don’t consider hurting people who aren’t as clever as other people a legitimate public benefit.

Wow