James Kwak has an interesting post over at The Baseline Scenario describing the battle lines being drawn over the Consumer Financial Protection Agency (CFPA) as pitting outcomes against principles:
I suspect that the real divide in the battle over the Consumer Financial Protection Agency is between outcomes and principles. CFPA supporters believe that policies should attempt to achieve the best possible outcomes for the largest number of people; if the number of people harmed by a product exceeds the number helped, then it should be banned, or at least made harder to buy. CFPA opponents believe that policies should faithfully reflect certain principles; in this case, people should be free to make their own financial choices, even if in aggregate most people will make bad choices, and they should bear the consequences of those choices.
To the extent this issue could be characterized as one of disclosure versus merit review, I find the discussion quite interesting because I write in the area of securities regulation where we in the U.S. made a clear choice (at least at the federal level) in favor of disclosure after the Great Crash of 1929. I think Kwak makes a great point when he notes that disclosure is only half the story (the other half being written in greater and greater detail by behavioral economists):
In order to get utility-maximizing outcomes, you need perfect information and rational decision-making. Disclosure gives you information about the product you are buying, but it doesn’t make you a rational actor – especially not when you have to make predictions about your own future behavior. Remember, not only are we a species in which 90% of people think they are above-average drivers, but 85% of people in hospitals who just caused auto accidents think they are above-average drivers.
I think the post and comments are well worth reading. The nuance I would add is that: (1) disclosure often isn't for the end purchaser, and (2) to say we are going to rely primarily on disclosure only begins the discussion. The fact that the stock purchaser never reads the prospectus (in the sec reg case) may not necessarily mean disclosure is ineffective when the executives, bankers, accounts, and lawyers have to sweat the details of all those disclosures with the threat of liability hanging over their heads. Furthermore, to acknowledge that we suffer from "bounded" rationality may merely mean that we need to do a better job of crafting the form and content of disclosures to overcome our inefficient biases.
