In the continuing saga of my debate with Mike Konzcal over the "libertarian litmus test" of the other day, he writes that the solution is a mandated vanilla financial option:  one for which there is no opportunity for tricks or hidden fees, but the up-front payment is probably higher.

It's not a terrible idea, necessarily, but if it's an actual option, I doubt it would accomplish much.  Banks will find ways to steer you into the more lucrative product--unless, of course, you're the sort of highly informed, financially disciplined consumer who doesn't need a vanilla option, and is in fact better off in the current system.

If it's not an option so much as the only option, then it's deeply problematic.

- Legally, it's would mean outlawing broad classes of services

- The up-front fees might push more marginal consumers out of the banking system entirely, which would not in general make them better off.

- Single option financial services aren't so good, which is the reason we no longer have the simple, folksy banking system of yore that so many bloggers have been pining for:  when inflation took off, that model spectacularly imploded and required, you may remember . . . a gigantic financial bailout.  That's not an argument for the craziness we often now have, but either extreme is probably bad.

- Single-option financial products would shut large numbers of people out of the mortgage market, and no, not just people who shouldn't be getting loans.  "Option ARM" products are actually a good product for the small number of consumers who have good but highly variable income; it lets them match payment to cash flow during lean months and make it up later.  "No doc" loans were originally for small business people with good expected income they couldn't document.

Better-designed transparency is probably a better solution--but has its problems too, which I'll address in a post tomorrow.