Friday, March 30, 2012

Consumer Protection Bureau Can Teach Financial Self-Help

by Robert H. Gertner


March 29, 2012

The long gestation of the Consumer Financial Protection Bureau, which was mandated by the Dodd- Frank Act, is over.

Now that the bureau’s chairman, Richard Cordray, is in place and it is rolling out programs, it is a good time to think about how government intervention can improve outcomes in the financial products consumers buy. Regardless of whether one prefers caveat emptor, a paternalistic federal government or something in between, the CFPB is a reality. Improving financial decisions by consumers is a worthy goal, but it will not be easy to design effective government actions to help them do so.

When consumers make poor financial decisions, they often do so because they lack information and understanding of product features. Financial literacy and sophistication is shockingly low: About one-third of the U.S. population understands the concepts of compound interest or how credit-card debt works. Such financial illiteracy is correlated with high levels of debt and high fees for financial services, and is greater among people with low incomes and low education, as well as minorities and the elderly.


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