Elizabeth Warren's Views Increase Financial Product Costs To Consumers

My comment to "Fine Print, Deceptive Pricing, and Buried Tricks" by Mark Thoma on Economist's View blog:

The explanation is too simplistic and continues the paternalistic attitude of Elizabeth Warren. Her paternalism includes her call for plain vanilla products and her call for a consumer financial product protection agency. She is a firm believer that consumers need protection and are unable to fend for themselves in a multi-product marketplace. Her view about credit cards is only one view and is probably wrong. If she were running an auto company, she would never understand why they have different models, different options, and different colors and have cars that sell for different prices. She wants us to return to the days when only white refrigerators were available and all Ford Model-T cars were black.

She tends in many of her examples to use only the consumers after they triggered a provision instead of the broader marketplace of all the product users at time of card issuance. She does not understand the false positive effect.

For instance, universal default does positive things. As Citi learned, it helps sell credit cards. The consumer is rationally responding to the positive effects of Universal Default at the time of card issuance. It allows Citi to issue cards at a lower rate than it would otherwise to individuals where Citi is unsure of their credit default risk. The uncertainty to Citi at time of card issuance of future default risk would normally require Citi to issue cards at a higher interest rate to people of both high and low risk for which Citi lacks enough information to distinguish from each other. Universal default shifts the risk from a guess at issuance time to an actual future event that increases credit risk, such as a future credit card default or late payment on another card.

Additionally, universal default acts as incentive to some cardholders to maintain their higher credit rating, which motivates some cardholders to maintain better credit. These people might not have taken the card without the motivating provision.

Looking only at the cardholders after their interest rate increased because of a trigger of the universal default provisions is the wrong universe of individuals. These people did things that if they had done it prior to the issuance of Citi's credit card would have resulted in an initial higher interest rate to them or a denial of their application for the credit card. They benefitted both from having credit for the period prior to their universal default trigger and for having a lower interest rate than their ultimately revealed credit rating deserved.

Sure, they are upset at having to pay a higher rate, but the alternative would have been a higher rate earlier in their credit use or no credit at all. Furthermore, other individuals are attracted to the credit card because of the extra motivation it provides to maintain a good credit rating.

Unsurprisingly, when Citi removed the positive benefits of its cards their card issuance rate declined. They removed the lower interest rate, the motivator for keeping good credit and the no false positive effect, i.e. putting lower credit risk people in with the higher risk higher interest rate people,

Nobody likes paying more for anything. We do not need an Elizabeth Warren for that. She focuses on only those who are paying more without focusing on those who are paying less and she is misleading. If a cost benefit to all credit card holders were done, she would see that many more cardholders benefit from lower rates due to universal default that the high interest rate to the small number who trigger universal default. Those that trigger universal default would have paid more in higher interest rates much sooner than they did by triggering the provision.

The Elizabeth Warrens and those that share her paternalistic and narrow understanding of the economics of banking have unnecessarily increased credit card costs to all of us.