Between the various power grabs and dubious regulatory proposals (each more dubious than the last!) from the likes of Geithner, Bernanke, Frank (.pdf), Dodd, etc., etc. you’d be excused for thinking the financial news from Washington (remember when financial news used to come from New York?) was all bad and growing only worse.

But there is a bright spot in this sad state of affairs:  SEC Commissioner Troy Paredes.  Appointed shortly before Bush left office (with one hand he gave us Troy Paredes; with the other he gave us import duties on Roquefort cheese. I leave it to you to assess the net), Troy is a once and presumably future law professor, treatise author, and all-around sound thinker on issues of corporate governance, corporate law and securities regulation.

Troy has voted against the SEC’s misguided proxy access proposal (see his official comments on the topic here), and he has made impassioned speeches evidencing an otherwise absent understanding of basic corporate governance explaining why the proposal (and others in the same vein) are problematic.  Fundamental to his approach are an understanding of  the role of risk, a humility born of his appreciation for the complexity of markets, and a constant emphasis on data and evidence-based regulation.

For example, here are some essential points from an excellent speech on the overall regulatory response to the crisis. You’ll never here the likes of Barney Frank, Tim Geithner or Larry Summers (the government incarnation) saying these things:

My basic point is this: Even in times of crisis and hardship, when the benefits of regulation seem apparent and there is pressure to “do something,” we cannot overlook the risk of overregulating. It is essential for the government to retain a healthy respect for the role of markets; and we must appreciate that there are limits to what we can and should expect from regulation.

* * *

Regulating to avoid excessive risk is not costless, whatever the benefits may be of securing the financial system and protecting investors and others from misfortune. Some risks simply are worth it if avoiding them is too costly because legitimate, wealth-creating enterprises and transactions are stifled. In other instances, efforts to clamp down on certain practices and activities may have unintended adverse effects, some of which could exacerbate the concern the regulation targets. This includes the prospect that government action may foster moral hazard. When properly framed, then, the regulatory objective should be to achieve the optimal degree of risk, not necessarily to minimize risk. Achieving the optimal degree of risk involves making tough tradeoffs, netting costs against benefits.

* * *

But I am more troubled by “how” systemic risk might be regulated. Identifying a market failure does not necessarily tell us what the appropriate government response should be. Even when there is a market breakdown, it remains possible for the government’s response to do more harm than good.

* * *

My principal concern turns on the potential scope of the systemic risk regulator’s authority. As a threshold matter, I still have not heard a satisfying definition of what constitutes a systemic risk. Systemic risk is easy enough to conceptualize in theory, but it is much more difficult to identify in practice. What does it mean for a firm to be “too big” or “too interconnected” to fail? A sort of “I know it when I see it” approach to regulating systemic risk is untenable. Such open-endedness accords the regulator too much discretion and is too unpredictable.

Moreover, Troy has made a basic, fundamental argument that I have heard from literally no one else in Washington in all of the debates surrounding executive compensation:  While managers may take on too much risk, they also may take on too little (an argument I have also recently made here):

In large part, the disclosure amendments respond to the potential that companies will take excessive risks. As regulatory reforms are proposed to address excessive risk taking, it is important not to overlook that just as a company can assume too much risk, a company also can be overly cautious. Placing undue emphasis on mitigating downside risk can be costly if it chills enterprises from taking the kind of prudent business risks that drive competition, innovation, and entrepreneurism. Our dynamic economy — marked by a constant stream of cutting-edge goods and services and an ever-expanding set of opportunities — depends on the willingness of individuals to take risks.

Most recently he has spoken about the impending Jones v. Harris case in the Supreme Court (on which see this essential post by Josh), and made some sensible remarks concerning the risks of intrusion (by courts as well as regulators) into well-functioning (and, to be fair, already-regulated) market transactions:

First, adequate market discipline can obviate the need for more exacting and burdensome regulation, including demanding judicial scrutiny of advisory fees. One can conceive of the section 36(b) fiduciary duty as compensating for a lack of competition in the mutual fund industry. Put differently, the legal accountability of section 36(b) can be thought of as substituting for a lack of market-based accountability. The industry, however, has changed since section 36(b) was adopted in 1970 and Gartenberg was decided in 1982. To the extent the industry has become more competitive, it may argue for greater judicial deference to the bargain the adviser and the fund strike. In the face of sufficient market forces that constrain advisory fees, the need for courts to monitor as strictly the adviser/board fee negotiations is mitigated.

Second, courts are not well-positioned to second-guess the business decisions that boards and others in business make in good faith. Judges may exercise expert legal judgment, but not expert business judgment. A judge may be equipped to monitor a board’s decision-making process, but should steer clear of the temptation to override substantive outcomes. These sensibilities cut against reading section 36(b) as implementing a sort of substantive limit on fees and instead recommend that courts focus on the process by which the fees were determined.

Of course I would be more strident and incautious in my remarks, but then I am not a public official with a need to ensure I don’t marginalize myself (a fact that may be endogenous to my stridency and recklessness, come to think of it).

There is more from Troy (find his speeches and statements here (scroll down)), and I expect we will see much more to come.  I know that there are many of us in the legal and academic communities who welcome these views, and I hope we will do whatever we can to ensure that they gain as much currency as possible.  I harbor no illusions about Troy’s ability to redirect Barney Frank’s steamroller, but I am delighted that he is out there, at the highest ranks of the government, fighting the good fight.

Professor Bainbridge reports. Hmmm….Possible market power, deceptive conduct, and increase in prices?

Just saying.

My colleague Tom Hazlett and his Information Economy Project at GMU is putting on a wonderful conference this week.  The public event is a debate between Michael Heller and Richard Epstein on the Gridlock Economy.  Following that event is an academic conference including: Harold Demsetz, Michael Meurer, F. Scott Kieff, Adam Mossoff, Kevin Werbach, Thomas Hazlett, Gerald Faulhaber, Doug Lichtman, Robert Merges and Chris Newman.

The conference agenda is available here and includes what should be a wonderful keynote from one of my UCLA advisors, Harold Demsetz, on “Transaction Cost Tragedies.”

The conference announcement describes the event as follows:

This event will explore a paradox that broadly affects the Information Economy. Property rights are essential to avoid a tragedy of the commons; defined properly, such institutions yield productive incentives for creation, conservation, discovery and cooperation.  Applied improperly, however, such rights can produce confusion, wasteful rent-seeking, and a tragedy of the anti-commons.

This conference, building on Columbia University law professor Michael Heller’s book, The Gridlock Economy, tackles these themes through the lens of three distinct subjects: “patent thickets,” reallocation of the TV band, and the Google Books copyright litigation.

Disclosure: I am a Senior Fellow at the Information Economy Project.  But don’t hold that against them.  Check out the conference!

Some serious reading first on American Needle, Inc. v. National Football League, No. 08-661 (U.S. S. Ct.):

• The FTC/DOJ Amicus brief in
• James Keyte and Paul Eckles (Skadden) on Sports Leagues and the Rule of Reason
• Chris Sagers in the Antitrust Source
• Michael McCann (Vermont Law School) forthcoming in the Yale Journal on the sports law implications of the decision

For those who prefer the lighter side of things, here is the Onion (HT: Peter Klein) invoking an Alchian and Demsetz (1972) angle on the Dallas Cowboys and their owner Jerry Jones:

IRVING, TEXAS — In an attempt to cut the franchise’s losses and “move forward in a positive direction,” the Dallas Cowboys severed ties with controversial owner Jerry Jones Monday, ending their tumultuous 20-year relationship with the divisive figure.

According to sources within the Cowboys organization, the decision to release Jones was influenced by the lack of any playoff victories in more than 12 years, the owner’s distracting sideline antics, and his selfish, “me first” attitude, which many said was having a cancerous effect on the clubhouse.

“We value Jerry’s contributions to the Cowboys over the past two decades, but it has become painfully clear that we just don’t share the same priorities,” Cowboys public relations director Richard Dalrymple said. “This wasn’t an easy choice to make, but we’re confident it is a decision that can only make our team better.”

Volume 16, Issue 4 of the George Mason Law Review (which I received in my mailbox today) has a well timed issue from its antitrust symposium featuring several articles on revisions to the Merger Guidelines.  Especially recommended is DOJ economist Greg Werden’s article here, which usefully sets the stage for some of the important debates.  Here is a key excerpt from Werden’s analysis, which I think can fairly be interpreted as coming out “against” revision:

The Horizontal Merger Guidelines usefully describe the agencies’ analysis without acting as a straightjacket. They allow the agencies to refine their analysis on a continuous basis and apply the best available tools. And they allow the agencies to take the enforcement action warranted by the available evidence. Changes in the intensity of enforcement are possible without changes in either the analytical framework or basic policies set out in the Guidelines. Because of the flexibility carefully designed into the Horizontal Merger Guidelines, only the efficiencies section was found in need of revision during the Clinton administration.

I believe that the business community and merger practitioners understand
current enforcement policy on horizontal mergers quite well. This is true with respect to general policies and also with respect to fine points on market delineation, competitive effects analysis, and evaluation of efficiencies claims. Therefore, I perceive no significant uncertainty that should be addressed through revising the Horizontal Merger Guidelines.

Moreover, experience suggests that a thorough revision of the Guidelines would take up to three years and occupy some of the agencies’ best people for a total of more than two thousand hours.39 Consequently, all new heads of the federal enforcement agencies would be well-advised to announce plans to issue revised guidelines only after both identifying the uncertainty to be addressed and formulating a plan to address it. Taking this cautious approach may lead to a determination that there is no significant problem or a determination that there is no satisfactory solution.

The Agencies’ press release is suggestive of a “workshop first” and consideration of “possible” revision later approach consistent with what Werden advocates in the last paragraph — though FTC Chairman Leibowitz’s statement (”The 1992 Guidelines explicitly stated that they would be revised from time to time… . We think the time has come to do that”) is a bit stronger about the likelihood of revision. Despite the prefatory language about possible revision, I’d set the probability at P=.90.

As I skimmed through the White House White Paper on innovation (HT: Patently-O), I noticed that a repeated theme in the document is that US innovation policy must “Promote Competitive Markets that Spur Productive Entrepreneurship” (e.g., p. 9).   There is no real substantive discussion of antitrust issues in the White Paper, except for the following passage, suggesting that the key role for antitrust in promoting innovation is to:

Protect small businesses from unfair business practices. In many industries, small companies are critical innovators, bringing enormous benefits to consumers while putting competitive pressure on incumbent firms. The Obama Administration is committed to enforcing the antitrust laws to insure that innovative entrepreneurs are not excluded from the market by anti-competitive conduct. The Department of Justice actively investigates allegations of exclusionary conduct as part of its law enforcement mission to keep markets open and competitive.

This language is hearkens to an era of antitrust where the protection of small businesses and individual competitors was an acceptable antitrust goal.  From an economic perspective, this view was long ago rejected on the basis of the new learning in industrial organization economics during the 1960s and 1970s.  The last sentence is rather unobjectionable.  Nobody is surprised that the Administration is interested in bringing more monopolization cases based on allegations of exclusionary conduct.  But I am a little bit surprised to see the open and explicit appeal to using antitrust as a weapon to protect small businesses.  Perhaps this is the product of a failure to communicate?  Maybe the administration antitrust crew ought to sit down and have a talk with the administration intellectual property folks and tell them that protection of small businesses (rather than the competitive process and consumers) is no longer considered a legitimate goal of antitrust in the courts, agencies, or by antitrust economists.

I note that, back in 2007, I criticized then Presidential Candidate John Edwards for making similar (but much more detailed) statements on his intention to use antitrust “to protect fair competition for small businesses and family farmers” and as a tool to attack vertical integration in the agricultural industry.  Candidate Obama’s antitrust statement pitches the standard “more is better” approach, but says nothing about protecting small businesses.

The possibility of new Merger Guidelines has been much discussed in the antitrust community, particularly in light of appointment of the two new chief agency economists, Carl Shapiro and Joe Farrell, who have done substantial work on the economics of horizontal mergers and market definition.  Today, the FTC and DOJ announced a series of workshops and period for public comment to explore potential revision of the Guidelines:

The agencies will issue a set of questions about the current Guidelines and possible revisions. Following receipt of public comments and original research addressing those questions or other issues related to the Guidelines, the agencies will host a series of five workshops. The workshops, which are open to the public and press, will take place in December 2009 and January 2010. The first workshop will be held in Washington, D.C., on Dec. 3, 2009, followed by workshops in Chicago, New York City and San Francisco. A final workshop also will be held in Washington, D.C.

“In light of legal and economic developments that have occurred since the last major revision of the guidelines, it is an appropriate time for the antitrust agencies to conduct a review of the guidelines to determine whether any revisions should be made to better protect American consumers and businesses from anticompetitive mergers,” said Christine A. Varney, Assistant Attorney General in charge of the Department’s Antitrust Division. “Having guidelines that offer more clarity and better reflect agency practice provides for enhanced transparency and gives businesses greater certainty when making merger decisions, resulting in a more competitive marketplace that benefits consumers.”

“The bulk of the Merger Guidelines is over 17 years old,” said FTC Chairman Jon Leibowitz. “The 1992 Guidelines explicitly stated that they would be revised from time to time. We think the time has come to do that.”

The FTC will post a set of questions on its Web site later today to begin the discussion on the Guidelines. The agencies are interested in receiving written comments from attorneys, economists, academics, consumer groups, the business community and other interested parties. The questions can be found at: http://www.ftc.gov/bc/workshops/hmg/hmg-questions.pdf.

Horizontal Merger Guidelines topics to be discussed include: the overall method of analysis used by the agencies; the use of more direct forms of evidence of competitive effects; market definition; market shares and market concentration; unilateral effects, especially in markets with differentiated products; price discrimination; geographic market definition; the relevance of large buyers; the distinction between uncommitted and committed entry; the distinction between efficiencies involving fixed and marginal cost savings; the non-price effects of mergers, especially the effects of mergers on innovation; and remedies. Public comments are also invited on whether to incorporate aspects of the 2006 Commentary on the Horizontal Merger Guidelines into the Guidelines themselves.

Additional information about the date, time, and exact location of the workshops will be provided at a later date. Speakers at the workshops will be drawn principally from those filing comments with the agencies. Interested parties should submit comments in accord with the procedures and time frame set forth on the FTC’s Web site.

More on this when the agency questions are posted.  For now, interested readers can start their homework here and here and here.  If readers are interested, perhaps we can put together a blog symposium on the potential revisions to the Guidelines.

The Chicago Public Radio series “This American Life” has an installment on price-fixing that antitrust buffs might be interested in (HT: former student Jan Rybnicek).  The series features an interview with Kurt Eichenwald, author of the Informant, the book now turned movie (featuring Matt Damon) centering around the Archers Daniel Midland price-fixing conpsiracy.

I noted last week that my colleague (and Volokh Conspirator) Todd Zywicki and I had written an essay, published in a Fin Reg 21 Symposium on the Consumer Financial Protection Agency Act of 2009, on “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009.”  The essay is now available on SSRN for interested readers (link above).  Here is the abstract:

The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

Another colleague and Volokh Conspirator, Ilya Somin argues here that political ignorance and cognitive biases exhibited by voters provide yet more reasons to object to the CFPA.  Ilya’s second point, that political ignorance and voter irrationality make regulatory institutions more susceptible to regulatory capture, is an especially important one in this debate.  Not to mention the frequently discussed problem of irrational regulators and judges.  More generally, Ilya gives another reason to believe that the claim that consumer (and voter) irrationality counsels in favor of more regulation rather than less is both under-theorized and not supported by the existing evidence.

If you’re in Chicago next week, and even if you’re not, go check out the Second Annual Searle Center Antitrust Economics and Competition Policy conference at Northwestern University School of Law.  The conference will take place September 25th and 26th and has a great lineup including a pretty good mix of theory and empirics.  My co-author (and former Director of the Bureau of Economics at the FTC) Mike Baye will be presenting our paper, Is Antitrust Too Complicated for Generalist Judges?  The Impact of Economic Complexity and Training on Appeals.

The rest of the conference agenda and other details are below:

Preliminary Agenda (as of July, 15, 2009)

Friday, September 25th

7:45-8:15 Continental Breakfast (WB 112)

8:15-8:30 Welcome and Introduction (WB 147)
David E. Van Zandt, Dean and Professor of Law, Northwestern University School of Law
Henry N. Butler, Executive Director, Searle Center, Northwestern University School of Law
William Rogerson, Northwestern University

8:30-9:30 Session One
Competition Policy and Property Rights
John Vickers, Professor of Economics and Warden, All Souls College, Oxford University
Discussant: Scott Stern, Associate Professor of Management and Strategy, Kellogg School of Management, Northwestern University

9:30-10:00 Break

10:00-11:00 Session Two
Toward a Test for Price Fixing – Social Objective, Detection, and Sanctions
Louis Kaplow, Finn M. W. Caspersen and Household International Professor of Law and Economics, Harvard Law School
Discussant:  Timothy Bresnahan, Landau Professor in Technology and the Economy, Stanford University Department of Economics

11:00-11:30 Break

11:30-12:30 Session Three
Is Antitrust Too Complicated for Generalist Judges?  The Impact of Complexity & Judicial Training on Appeals
Michael R. Baye, Bert Elwert Professor of Business, Kelley School of Business, University of Indiana
Joshua D. Wright, Assistant Professor of Law, George Mason University School of Law
Discussant: Henry N. Butler, Searle Center, Northwestern Law

12:30-2:00 Lunch
Keynote Address: The Relationship Between Antitrust and Regulation in Light of Trinko
Howard Shelanski, Deputy Director for Antitrust, Bureau of Economics, FTC, and UC Berkeley

2:00-3:00 Session Four
Dynamic Merger Review
Michael Whinston, Robert E. and Emily H. King Professor of Business Institutions Department of Economics, Northwestern University
Discussant: Michael Riordan, Laurans A. and Arlene Mendelson Professor of Economics, Columbia University

3:00- 3:30 Break

3:30-4:30 Session Five
Competition Policy and Financial Distress
Ezra Friedman, Professor of Law, Northwestern University School of Law
Marco Ottaviani, Professor of Management and Strategy, Kellogg School of Management, Northwestern University
Discussant: Jonathan Baker, Professor of Law, American University’s Washington College of Law

4:30- 5:00 Break

5:00-6:00 Session Six
The CC’s margin-concentration analysis in the UK Groceries Inquiry
Jerry Hausman, John and Jennie S. MacDonald Professor, MIT, Department of Economics
Discussant: Aviv Nevo, Professor of Economics and Marketing, Northwestern University, Department of Economics

6:00-7:00 Cocktail Reception (WB 440)

7:00- 9:00 Dinner (WB 540)
Keynote Address: Microeconomic Policy and Competition Policy
Joseph Farrell, Director, Bureau of Economics, FTC and UC Berkeley

Saturday, September 26th

8:00-8:30 Continental Breakfast (WB 112)

8:30-9:30 Session Seven
Insurance, Consumer Choice, and the Equilibrium Price and Quality of Hospital Care
Michael Katz, Harvey Golub Professor of Business Leadership and Professor of Management, New York University Stern School of Business and UC Berkeley
Discussant: David E.M. Sappington, Lanzillotti-McKethan Eminent Scholar, University of Florida, Department of Economics

9:30-10:00 Break

10:00-11:00 Session Eight
Not Good Enough for Government Work: Geographic Market Definition and The FTC’s Case Against Chicagoland Physician Associations
Fred S. McChesney, Class of 1967 James B. Haddad Professor of Law, Northwestern University School of Law
Discussant: John Simpson, FTC

11:00-11:30 Break

11:30-12:30 Session Nine
The Economics of “Radiator Springs:” Industry Dynamics, Sunk Costs, and Spatial Demand Shifts
Thomas Hubbard, John L. and Helen Kellogg Professor of Management and Strategy, Kellogg School of Management, Northwestern University
Discussant: Steven T. Berry, James Burrows Moffatt Professor of Economics, Yale Department of Economics

12:30 Adjourn (Box Lunch Available)

Location
Northwestern University School of Law
Wieboldt Hall
Room 147
340 E. Superior Street
Chicago, IL 60611

Not very, according to the President in his recent health care speech, making the case that lack of competition and for-profit monopolists are what ails the health care market:

“Consumers do better when there is choice and competition. Unfortunately, in 34 states, 75% of the insurance market is controlled by five or fewer companies. In Alabama, almost 90% is controlled by just one company. Without competition, the price of insurance goes up and the quality goes down…an additional step we can take to keep insurance companies honest is by making a not-for-profit public option available in the insurance exchange…”

I wondered where these figures came from when I heard the President rattle them off during the speech.  Indeed, a 75 percent share protected by regulation that immunizes firms from out of state competition might well be sufficient to allow monopoly pricing.  So, are these figures correct?

The short answer is no.  Economist John Lott re-runs the numbers correcting for an important error: the figures the President gave mistakenly leave out employers that self-insure and fund their own plans.  This is not a trivial omission as one source estimates that approximately 55 percent of employees are insured under such plans.  Lott corrects this error and recalculates shares for the top 15 most concentrated states (uncorrected):

As you can see from the Table (click on it), the corrected shares are significantly lower. Lott also points out that the largest insurer in most states is already a non-profit enterprise.   If competition, monopoly power, and barriers to entry are going to be an important part of the health care discussion, as with any discussion in involving industrial organization economics, it is important to get the details right in order to generate accurate predictions and policy prescriptions.

The ABA Journal (HT: Steve Salop) has an interesting item suggesting that Jones Day’s policy of keeping compensation secret might be paying dividends in a tough economic climate:

Jones Day’s secrecy surrounding compensation may be aiding its rapid expansion in the San Francisco Bay area.  Jones Day has grown from a couple of dozen Bay Area lawyers in 2003 to 137 lawyers in its San Francisco and Palo Alto offices, the Recorder (sub. req.) reports. Observers say the law firm’s closed compensation system is helping its efforts to hire quality laterals because partners don’t know what the new hires are paid and can’t complain.  Often laterals are paid a premium that is higher than the average partner salary, the story says. Secrecy aids hiring and collegiality.

The article notes that the business card for Joe Sims, the lawyer heading up the West Coast expansion, doesn’t indicate his title or business area. His explanation: “We don’t do titles here.”

The story concludes that there are a lot of things Jones Day doesn’t do. “It doesn’t tell its partners what other partners make, it doesn’t issue profit figures, it doesn’t pay bonuses, it doesn’t let partners vote on who will head the firm, it hasn’t conducted mass layoffs, and it doesn’t pay associates in lockstep.”  The lack of mass layoffs has also helped the law firm grow, since about half the firm’s headcount in the San Francisco area came from hiring new law school graduates, many of whom remain at the law firm.  Partners at Jones Day are paid based on contribution, leadership, collegiality and reputation—not client originations, according to Robert Mittelstaedt, the partner in charge of the San Francisco office.

“There have been a handful of people that have said I don’t want to go to a place where I’m not paid in bonuses if I bring in more business,” Mittelstaedt told the Recorder. “When people have that reaction, I just tell them Jones Day is not for them.”

My colleague Todd Zywicki and I have a piece out in Lombard Street today on the proposed new Consumer Financial Protection Agency.   The issue has a number of contributions from proponents and critics of the new agency.   The piece is well timed, with President Obama making the case for the CFPA in his Wall Street speech and specifically linking failures of consumer protection with the financial crisis:

First, we’re proposing new rules to protect consumers and a new Consumer Financial Protection Agency to enforce those rules. This crisis was not just the result of decisions made by the mightiest of financial firms. It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages. And while there were many who took out loans they knew they couldn’t afford, there were also millions of Americans who signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth.

CFPA proponents, and now President Obama, have made this claim repeatedly in defending the CFPA.  But to my knowledge, there is no empirical evidence to demonstrate that consumer mistakes in lending markets played a substantial role in causing the financial crisis.  Zywicki and I expand on this point in the short article.

President Obama goes on to explain the claimed benefits of the new agency:

This is in part because there is no single agency charged with making sure it doesn’t happen. That is what we’ll change. The Consumer Financial Protection Agency will have the power to ensure that consumers get information that is clear and concise, and to prevent the worst kinds of abuses. Consumers shouldn’t have to worry about loan contracts designed to be unintelligible, hidden fees attached to their mortgages, and financial penalties – whether through a credit card or debit card – that appear without warning  on their statements. And responsible lenders, including community banks, doing the right thing shouldn’t have to worry about ruinous competition from unregulated competitors.

Now there are those who are suggesting that somehow this will restrict the choices available to consumers. Nothing could be further from the truth. The lack of clear rules in the past meant we had innovation of the wrong kind: the firm that could make its products look best by doing the best job of hiding the real costs won.  For example, we had “teaser” rates on credit cards and mortgages that lured people in and then surprised them with big rate increases.  By setting ground rules, we’ll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best product, not the one that’s most complex or confusing.

This last paragraph doesn’t make any sense to me.  The President denies that the CFPA will restrict consume choice and says nothing could be further from the truth.   But in the very next sentence, the President explains exactly how the agency will restrict consumer choice.  The defense of the restrictions in consumer choice is that the CFPA will pick out choices that are bad for consumers, e.g. teaser rates on credit cards and mortgages.   A restriction of choices viewed as “bad” by the new agency is still a restriction in choice.  The Obama administration’s defense is that this restriction in choice is good for consumers because they make bad choices in financial product markets.  Many have been persuaded by that argument.  I am not.   But I want to make highlight that I find it interesting that the President really seems to be saying that the CFPA will identify choices and “the kind of competition” that generates “bad” choices for consumers and eliminate them from the menu.   I don’t understand how, given this argument, claims that the agency will restrict choice are “far from the truth.”

One can make a slightly more sophisticated claim that there will be no reduction in choice because, as those who have been following the CFPA debate will know, the new agency would also have power to approve “plain vanilla” lending products and could force lenders to offer the plain vanilla product before any alternative. In this scenario, proponents argue, consumer choice is not reduced because the non-vanilla product can still be offered.  But notice that this “choice-neutral” interpretation of the CFPA assumes that: (1) the CFPA does not have the authority to simply prohibit some products outright, and (2) that any costs that the CFPA imposes on consumers demanding non-standard products or lenders wishing to offer them will not impact their profitability and, in turn, likelihood that lenders are willing to offer them or consumers incur the cost to select their preferred product.  To the contrary, the CFPA does have the authority to ban products.  And it is a relatively straightforward argument that just because the CFPA will allow the sale of non-vanilla products does not mean that we will not see a reduction in choice if the costs of buying and selling those products increase (and profitability decreases).

More generally, critics of the CFPA,  including myself, are worried about the extremely wide latitutde the proposed agency will be granted  in its ability to design products, prohibit products, and impose costs on consumer decisions to purchase (and lender decisions to offer) non-vanilla products.  Given the CFPA’s explicit and deep links to the behavioral law and economics literature and its style of cost-benefit analysis, one can quite logically be concerned that the CFPA will exercise its authority to identify and prohibit “bad choices” for consumers in a manner that chills welfare-increasing forms of competition and product variety.

In any event, the right economic question, it seems to me, is whether the regulations promulgated by the CFPA with its authority are likely to improve consumer outcomes.  This includes contributing to avoiding future financial crisis, obviously.  With respect to the latter, I’ve seen no convincing evidence proferred by the administration or CFPA proponents that failures of consumer protection contributed to the financial crisis.   With respect to the former, as discussed in greater length in the Lombard Street piece (and even greater length in a forthcoming paper on the CFPA with David Evans — look here soon for the link), the claims that consumer mistakes in consumer financial product markets justify the contemplated restriction in consumer choice and reduction in availability of credit from an economic perspective are even more dubious.

Comes by way of US Trade Representative Ron Kirk defending the protectionist White House move to impose a 35% tariff on imported Chinese tires as … wait for it … well, just read for yourself:

The three-year remedies, consisting of an additional tariff of 35 percent ad valorem in the first year, 30 percent ad valorem in the second, and 25 percent ad valorem in the third year, are being imposed after a finding by the United States International Trade Commission that a harmful surge of imports of Chinese tires disrupted the U.S. market for those products. . . .

“This Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system.”

HT: Peter Klein.