04 September 2009

How To Save a Trillion Dollars

One of my most awkward moments teaching seminars came in an event that included a contingent from a chain of pawn shops. The "finance" company wasn't called a pawn shop, but that is what it was and they had been making a ton of money. When I learned how they operated - a lunch time conversation - I challenged them. This did not go over well and made the next 2 1/2 days awkward. Pawn shops in Florida (and I suppose most states) can essentially charge exorbitant rates to people desperate for money. Even credit card companies cannot charge such high fees. But because they are not banks, pawn shops' interest rates are not regulated like banks.

After the Great Depression, the government regulated banks to make financial markets safer.

After World War II, nonbank corporations found a way around that regulation by offering many of the same products and services as banks. This has proven problematic. Not just to people forced to pawn their goods but to the economy as a whole as the offerings of nonbank corporations has grown to more closely resemble that of commercial and investment banks.

Elizabeth Warren, Obama's expert on consumer finance, a woman who knows her stuff, has written a piece explaining how the Obama administration is passing legislation that will regulate products and services regardless of whether they are offered by banks or nonbanks.

The great news is that the Obama administration appears to be on track on making the reforms that will make it less likely that we'll need bailouts that cost trillions. Financial market regulation has been overlooked for too long. The sad news is that they have to start by solving such seemingly obvious problems.


Anonymous said...

I liken the Obama administration and Obama to the college student or consultant that gives a great and beautiful power point management presentation based on concepts and without all the facts. Implementation is impossible. Kind of like a salesman that can talk a good game but never close the deal. I just fired one of those the other day.

Daryl said...

It is amazing how little we agree on Ron which is why I love discussing things with you. You think about things deeply and somehow always reach the opposite conclusions. People don't have to choose pawn shops, they clearly are choosing to use them because they provide a service that they think is valuable. Why do we need regulation there? I doubt pawn shops are going to bring down the economy because they are not regulated.