The Miracle that Failed

Yesterday, I posted about the rabid, pro-free-market rhetoric present in Washington, DC over the past decade. When Congress had the opportunity to consider privacy laws that would limit marketing of financial products, it chose to side with bank lobbyists, who invoked the idea of the “miracle of instant credit.” Basically, they argued that any incursion on the free market would harm credit markets. They promised that this miracle would lower credit prices, make credit more convenient, and manage the risk involved in lending. Congress sided with the banks. As a result, many financial products were marketed to people who didn’t deserve mortgages. And now you’re paying for it. You’ll soon be paying their auto loans and credit card bills too.

To get a flavor for the atmosphere, check out this Congressional testimony by John Dugan. It was delivered on behalf of the Financial Services Coordinating Council, American Bankers Association, and the American Insurance Association. Dugan was listing the various benefits of having a federal standard for information sharing, unfettered by state privacy laws:

Better risk management. Risk management is a crucial factor in every decision that a financial institution makes, including determining what types of products and services to offer. Undercutting this decision-making process has important implications. For example, if a lender cannot depend on credit files that are truly complete, loans may not be extended or may become more expensive in order to account for the higher level of risk. Moreover, Cate and Staten find that robust, national credit reporting has made it possible for more people to have access to more credit without significant increases in defaults.

Oops. That risk management apparently wasn’t good enough. So, you didn’t get privacy protections or good risk management. And who’s John Dugan, you ask? Well, he’s now one of the principal regulators of banks–he is the Comptroller of the Currency and a director of the FDIC.