I wouldn't normally think it's necessary to explain that financial products and defective cars are very different things, but a new comic from the Center of Responsible Lending makes me feel the need to do so. It intends to humorously argue for the creation of a Consumer Financial Protection Agency ("CFPA"). The comic imagines, "If Anti-CFPA Folks Ran Toyota Today." It then has several amusing slides that seek to compare faulty cars to consumer products. Unfortunately the analogy doesn't work.
I can't include the entire comic in this post, so check it out here if you want. But a few of the slides' speech bubbles are below:
No one made the people buy these cars -- folks need to take personal responsibility for their decisions!
Fixing these cars will raise the price of cars in the future, and hurt deserving drivers!
Most of the cars on the road don't have accelerator problems, so let's not overreact!
Car buyers should be better educated about how car engines work!
The idea is that financial products, like cars, can be dangerous, and regulators should exist to make consumer financial products safe, just like automobiles.
But Toyota's debacle is clearly different from, say, the subprime mortgage crisis. The Toyota cars did not operate as they were meant to. They were defective. No amount of consumer understanding or information about those cars could have prevented this.
Compare that to consumer financial products -- quite the opposite is true. The products performed perfectly well. If all borrowers had been able to afford their subprime mortgages, for example, then everything would have been fine. Of course, they couldn't, so bad things happened. But the defect wasn't in the product: it was in the buyer. Or more appropriately, it was in the buyer's understanding of the product.
Better disclosure might have helped with subprime loans, for example. If people had understood that their payments could increase dramatically or that real estate prices could decline, then there may have been fewer of the loans made. If you want to draw a good comparison, then imagine if Toyota had disclosed that there was an accelerator problem before selling the cars. Clearly, that's all the consumers would need to know to avoid the problem, and the autos. Would you have much sympathy for anyone who then knowingly purchased one?
But you don't need a consumer financial protection agency to strengthen and/or simplify disclosure. That's easy for a current regulator to require. A CFPA's purpose would be to limit how products work and sometimes the products themselves.
Let's run with the auto example. Perhaps a consumer protection agency for autos would have outlawed SUVs some years ago, because they have a tendency to roll during accidents. Perhaps they would have regulated that the maximum speed car can go is 50 mph, because if you go faster than that, then the likelihood of a fatal accident increases.
And just like how non-defective cars can be dangerous if used improperly, so can sound consumer products. Drag racing Volvos can be dangerous; similarly, the overuse of credit cards can be hazardous.
Those who are against the CFPA aren't against consumers understanding the products they're buying: they're against over-regulating the financial products market and limiting product offerings. This has nothing to do with defective products -- they would obviously already be illegal. That's like if a bank had a mortgage that accidentally charged you the wrong amount of money each month, compared to what the promissory note dictates. Better disclosure of and education about financial products would provide consumers with the ability to make sound decisions regarding financial products, just like they do with non-defective cars.
(h/t: Baseline Scenario)