How is a consumer protection agency elitist?
Peter Wallison: Yeah well, it's elitist -- it was elitist as the administration proposed it. It is not elitist anymore because Congress has dropped the most significant elements of the administration's proposal that were elitist. But just to outline just what they were and why they were elitist, it had to do with something called a "plain vanilla product." The case of the "plain vanilla product," or what the administration was proposing was that every one that was offering any kind of financial product to the consumers had to have a "plain vanilla product" that went along with it.
What they were essentially saying is, a lot of people who buy financial products are too stupid to understand the complexities and the trouble that those products can cause them. So, there's no amount of disclosure that is going to be satisfactory for those people. We really have to make sure that they are offered products that can't get them into any trouble. All right, well fine, and that's an elitist point of view about people that they really aren't smart enough to understand things that they are told, but if you think about it from the standpoint of the providers, what does the provider do? There's someone sitting across the desk from him and he's talking about a mortgage. Well, can you offer him a plain vanilla mortgage, or can you offer him another kind of mortgage, a more complex one? Is he capable of understanding those things. And since there would be terrific enforcement problems and risks associatied with selling a complex product to someone who couldn't understand it, the providers are always going to offer to the person across the desk, if he's not well-educated, if he doesn't have a financial background, he's going to be offered the plain vanilla product even though many such people who didn't happen to go to college can perfectly well understand the risks if they're properly disclosed in any kind of product.
But what it would do is, the providers, trying to protect themselves, would have denied to people who were perfectly capable of understanding these things, products that they believe these people cannot understand. And there's no way to know whether a person understands a product or not.
So, I was very worried about this when it came out because it looked to me as though they were then dividing the country between people who were educated and elite, and people who were not because the elites, the ones who went to college, the ones who have financial background would get the complex, useful, valuable, products, whereas the people who were not clearly of that level in the eyes of the provider would not. And that is a very bad idea to start with in our democracy. So, I was very disturbed about it. I wrote a lot about it, and fortunately, Congress dropped that idea.
Recorded on December 21, 2009