Saturday, June 13, 2015

Untouchable Federal Agency Schemes Behavior Economics

Sometimes I can’t understand why the American people believe the lies perpetuated by the central planners in Washington D.C.   The central planners created the 2008 housing bubble and subsequent financial crisis.  They blamed everyone but themselves and declared they’ll fix the problem by passing more laws and creating more government agencies, all the while, rewarding bad actors like Fannie Mae and Freddie Mac, who by the way, own over 90% of the mortgages in the United States.

Once again, the American people have been bamboozled into thinking the private sector was solely responsible for this crisis and that more regulations are needed to prevent this from happening again, when in fact, we need to get rid of the laws and agencies that ensured a financial crisis and will certainly create another one in the near future.

The central planners capitalized on our misery by implementing Dodd-Frank.  They created a government agency benignly named, The Consumer Financial Protection Bureau, whose mission is to guide the behavior of the American people by approving, or disapproving our economic decisions.  This new school of governance was created by progressives like Senator Elizabeth Warren who believe we are incapable of making sound financial decisions without their benevolent hand.

Carolina Journal Radio discussed this progressive economic stratagem with associate economics professor Adam Smith with Johnson and Wales University.  Here is an excerpt:

Kokai: Now you mentioned behavioral economics. For those in our audience who are not particularly familiar with the term, they might know the book Nudge. … What is the impact of behavioral economics on this approach? Is this having a negative impact on what this group ought to be doing?

Smith: It’s hard to disassociate the two, because [Massachusetts Sen.] Elizabeth Warren, who was obviously the champion of the agency, wrote a strongly argued and very important paper that basically set up the agency, and the paper was filled with behavioral analysis. 

See, what behavioral economics has done is it’s questioned the traditional assumption of economics that we are, for the most part, rational in our decision making. And where they’ve, I think, made some great contributions is showing, yeah, there are certain patterns that people have where we aren’t completely rational, OK? 

We all know that we’re not always rational and so forth, but the problem is, is that you’re finding certain, you know, quirks that humans have, and then immediately assuming that you can use that information to tailor policy … toward the marketplace. 

But it doesn’t all quite fit together, and what pops out of that is not the kinds of careful analysis of human behavior that the academics are performing. It’s more just another excuse for very heavy-handed regulation, that ends up not looking at all like its source material.

Kokai: One of the other concerns I’ve heard about behavioral economics is it basically, as we said from the book title, nudges or steers people toward certain conclusions, things that they will do, and someone, somewhere, has to be the one who decides: Where are we going to steer them? Where are we going to nudge them? [This] is definitely, completely different from what the market would come up with, isn’t it?

Smith: Correct, so not only are they deciding what’s best for all consumers — something that I think even [Richard] Thaler and [Cass] Sunstein, the authors of Nudge, would disagree with — but usually these nudges become shove-like very quickly. So, for example, when you say this credit practice is bad, so we eliminate it, that’s not a nudge. We’re not nudging people away from a bad credit practice. 

And the few times, I should say, that they have employed nudges, consumers have surprised them. One example is they said that, well, consumers are overusing overdraft protection, so what we’re going to do is we’re going to require every customer to opt in to overdraft protection, which they felt would clearly reduce the number of people who used the service.

Turned out [that] wasn’t true. Everyone opted back into overdraft protection, especially the people who were using it the most before. Again, obviously, they think it’s a valuable service.

Kokai: Now moving forward, we have this Consumer Financial Protection Bureau, for good or ill. What should they be doing, rather than having this behavioral economics analysis guiding their acts?

Smith: I don’t think, as I was saying before, given the link between the two, I don’t think you can break them apart. I think it is what it is. I would say, though, that — the Wall Street Journal just wrote a piece on this, it’s a long shot — but it’s possible that the agency could be constrained in a way that it really always should’ve been, but, unfortunately, because of the environment surrounding the financial crisis, didn’t happen. And that is, having a bipartisan commission that oversees the agency’s policies and so forth, and, most importantly, having control over their budget.

Right now, Washington has absolutely no control over this agency’s budget. It’s housed within the Federal Reserve and cannot be touched, even by the Federal Reserve itself. I mean, they’re basically cowboys out there, playing whatever game they want to play with no oversight whatsoever

We have another untouchable federal government agency playing games with the American people?  Say it isn’t so!


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