The Unintended Consequences of Unintended Consequences Articles

This is commentary on commentary. Actually, it should be "commentary on reporting," but the Forbes April 26 article "Careful What You Wish For" isn't really an article, it is opinion.

The idea behind the article is that current Congressional work on restricting banks' and financial companies' abilities to issue abusive debt to consumers will have unforeseen consequences that will impact the consumers in ways that the Government doesn't expect. This is a fine thesis, one that probably is even correct in the large, but the author fails to make his point in ways that really count.

The article has a whiny tone, the kind a liberal would expect a right-leaning article on consumer finance to have. Policy based on behavioral economics research is ridiculed as an "assumption." Phrases like "regulatory overreach," "furious new round of maneuvering," and "variety of dastardly practices" lay down a challenge to the reader, as though designed to stir a rebellion.

The article does admit that that "consumers do dumb things." But ultimately, this admission is drowned out by all the contention so that the article fails to score the direct hits that should have easy to come by. So since Forbes couldn't pull it off, here's my list:

- Some consumer financing products have drug-like qualities, with extremely high costs and the ability to addict some consumers to financing they don't understand.

- Some financial deals are made so complex that it is nearly impossible for even an educated consumer to find the implied interest rate. A perfect example are balance transfer offers at 5.99% with a 4% fee that have only a 6 month term. Most consumers don't realize that this "money saving offer" has an implied APR of 15.31%.

- When high-risk consumers are protected from high interest rates, banks will simply refuse to lend to them at all. Depending on your perspective, this could be exactly what should happen, or it could be a problem. After all, if a consumer always makes their borrowing decisions based on immediate gratification, then they are a terrible credit risk and perhaps they shouldn't be given credit at all. It isn't cruel; it's good parenting.

- Restrictions on pay day loans will cause an increase in illegal loan-sharking. If an instant-gratification-addicted consumer can't get a payday loan because they are illegal, they may turn to the black market for their financing. Prohibiting fringe behavior will drive it underground, where the dangers of non-payment are physical, not just fiscal.

- High interest rates are necessary where risk of default is very high. And some people are just really bad credit risks. They don't have the money, they don't intend to pay it back, or they just don't want to pay it. So credit grantors have lost more than $313 billion in the last decade, according to Forbes. Which means that the consumers "won" and the purportedly smarter banks got taken! So maybe financial regulation will protect the banks from themselves more than they protect consumers from themselves!

- The logical extension to protecting all of these bad banks and bad consumers from each other is that financial regulation will chill the credit market. I'm not sure that is a bad thing. It may be exactly what this country needs: A blast of ice water in the face that cools the prevalent idea that borrowing more than you make is a good idea. Perhaps forcing everyone to live a little closer to their actual production rate will pay huge dividends in moral values, savings rates, and set a better example for our children.

All in all, I think there were some valuable points to be made that were simply dropped on the floor. There is also a minor goof in the mortgage example in "Financial Foolishness" box.