Elizabeth Warren has a new idea for strengthening consumer protection:

In an interview on Tuesday with National Journal, Warren said new techniques like crowd-sourcing – scaled-up variations on Wikipedia — make it possible to collect valuable information from millions of ordinary consumers who report problems as they arise. Using new systems to organize and find patterns in all that information, Warren said, the bureau could be able to spot new enforcement targets in a matter of days — an unheard-of response time for traditional regulators.

I wouldn’t dismiss this out of hand, and I like the idea of drawing on public sector expertise. In an ideal world, this form of crowd-sourcing wouldn’t primarily serve to identify enforcement targets. Rather, it would become a valuable clearinghouse for consumers to understands the strengths and weaknesses of various financial products. Yes, the private sector has solutions along these lines, including non-profit guides. But I can see some virtue in having a “neutral” source of information that could help the most scrupulous and transparent financial institutions stand out from the crowd.

The deeper problem, depressingly, is that the incentives for being a good corporate citizen in this domain might be too weak. Hidden fees, etc., might be so lucrative that they dominate the alternative strategy of transparency plus high volume. Tim Harford wrote about this phenomenon in Slate in 2008, drawing on work by the awesome economists Xavier Gabaix and David Laibson:

If one bank has tempting interest rates but hidden fees while the rival offers lower rates but no hidden fees, an advertising campaign could easily backfire.
“Our prices include no hidden fees” is a nice enough slogan, but the implicit message to sophisticated customers is, “If you are good at avoiding hidden fees, you might care to bank with our rivals.”
The advertising campaign would drive sophisticated customers toward the exploitative competitor where, being sophisticated, they would not allow themselves to be exploited. Meanwhile, the no-hidden-fees bank would attract naive customers but fail to take advantage of their naiveté. The result would be that the expensive adverts pushed both types of customer to where they would spend less, and both companies would be worse off.

Brilliant and sobering. This subject is of particular interest to me, as I am obsessive about avoiding hidden fees. It’s not obvious that there’s much we can do about the fact that some people are savvier financial customers than others. We can police the most extreme abuses, but there’s a basic level at which this will always be a trial-and-error process. Perhaps we should focus on improving the quality of public institutions, where the challenges are arguably less intractable.