Alan Blinder has an interesting discussion of the CFPA concept in the WSJ. As readers of The Agenda know, I’m not averse to tough regulation of the financial sector. But I do worry that the CFPA concept is based on a flawed premise:

The first is the fate of the proposed Consumer Financial Protection Agency (CFPA). You remember that idea: a proposed new agency to protect ordinary Americans from being duped. The banks, the Chamber of Commerce and many Republicans hate the idea.

I wouldn’t say I hate the idea. Rather, I think we need to think rigorously about it. While I think that leverage and capital requirements are vitally important, and I understand that there is a demand for simple, straightforward financial products, I’m not sure the CFPA approach is ideal.

In many countries, including the United States in decades past, the demand for consumer-friendly financial products has been met directly by the state, e.g., through postal savings accounts invested in ultra-safe state assets. We’ve moved away from this model and towards explicit guarantees for for-profit firms. It’s hardly surprising that these guarantees come with strings attached — more and more strings all the time.

As I suggested last week, Steve Randy Waldman’s call for a reform of deposit insurance is one way forward: provide large depositors with a powerful incentive to monitor the financial health of the banks. But another way to go, one that’s not incompatible with that approach, is simply to offer postal savings accounts with “vanilla” features, and allow the private financial firms do what they’d like. Rather than have the public subsidize for-profit firms, we’d create a “public option.” Many will object to this as statist. But is it actually less statist than pervasive state guarantees for virtually all firms? The idea is to make the subsidy narrow and explicit. The public “vanilla” products would presumably be less attractive than private products in many respects — they’d just be less risky.

Basically, I think the goal Blinder has in mind — a financial marketplace in which no one is duped — is impossible. Financial decision-making is hard. And, as a friend pointed out to me earlier today, our consumer economy is all about duping people. Do I really need an iPad? Of course not. But I bought one all the same. To be sure, risky financial products introduce all kinds of unique dangers. No one can deny, however, that the marketplace is about manufacturing wants and needs, a process that one could easily compare to the manipulation that Blinder describes. Manipulation is in the eye of the beholder, and the truth is that the literacy and numeracy one needs to navigate this terrain well is not evenly distributed across the population: my mother has far more of it than I do.

I don’t have a settled view on this question. But I am puzzled by how Blinder seems to believe that the problem that the CFPA sets out to solve really can be solved in any meaningful sense through the mechanism he describes.

To tell you the truth, I often think that we’ve all been collectively duped into believing that we shouldn’t all be hunter-gatherers who eat bananas and breadfruit all day while foraging for, at best, 2 or 3 hours. Pre-agricultural man existed in conditions of almost unimaginable affluence when you factor in leisure. Yes, I’d miss access to the local multiplex and new records. But that just means I’ve been thoroughly duped! And no Hunter-Gatherer Protection Agency will reverse that, I’m sorry to say.