These bills are elaborate, complex and defy tidy characterization.  All are likely to change, some significantly, as the legislative process grinds along. The Senate Banking Committee is unlikely to produce anything equivalent until well into November.

In general, however, together the House FSC’s work would make for sweeping change.  The bills would:

(1) create three new federal agencies: a Federal Oversight Council, a Consumer Financial Protection Agency and an Office of Federal Insurance;

(2) considerably expand powers of the Securities Exchange Commission, including by [...]]]> The Staff of the House Financial Services Committee is extremely busy and doing a very good job of keeping its role in the legislative process transparent. A reasonable run down of current activity in financial regulation reform appears here. (You can even sign up to get email alerts.) 

These bills are elaborate, complex and defy tidy characterization.  All are likely to change, some significantly, as the legislative process grinds along. The Senate Banking Committee is unlikely to produce anything equivalent until well into November.

In general, however, together the House FSC’s work would make for sweeping change.  The bills would:

(1) create three new federal agencies: a Federal Oversight Council, a Consumer Financial Protection Agency and an Office of Federal Insurance;

(2) considerably expand powers of the Securities Exchange Commission, including by subjecting rating agencies to considerable regulation and oversight by the SEC plus eliminate an exemption to the Investment Company Act of 1940 for private financial advisors.; and

(3) expand the mandate and powers of the Commodity Futures Trading Commission concerning regulation of derivative securities.

These pending Committee steps, of course, are in addition to bills the House passed earlier this year, including the summer’s Corporate and Financial Institution Compensation Fairness Act of 2009, embracing shareholder say on executive compensation to a certain extent.

At this link, you can access pending bills totaling just about 1,000 pages.   Following is an additional breakdown:

NEW AGENCIES

Financial Stability Improvement Act of 2009 (draft 10/27) (253 pages) (would create a Financial Services Oversight Council with extensive authorities and duties)

Consumer Financial Protection Agency Act of 2009 (draft 9/25) (291 pages) (would create elaborate new independent federal agency, the CFPA, with broad regulatory powers, many taken away from the Federal Reserve) [summary here]

Federal Insurance Office Act of 2009 (draft 10/16) (15 pages) (would create federal office within the Treasury Department, the FIO, to monitor insurance industry) [summary here]

EXPANDED SEC POWERS

Investor Protection Act of 2009 (draft of 10/16) (153 pages) (would expand powers of the Securities and Exchange Commission in substantial ways) [summary here]

Enhanced Accountability and Transparency in Credit Rating Agencies Act of 2009 (draft 10/16) (37 pages) (would considerably expand SEC oversight of rating agencies and prescribe important aspects of their governance structures and policies and procedures) [ summary here]

Private Fund Investment Advisers Registration Act of 2009 (draft 10/16) (11 pages) (would eliminate private adviser exemption from Investment Company Act of 1940)

EXPANDED CFTC MANDATE AND REGULATIONS

OTC Derivatives Markets Act of 2009 (draft 10/2) (187 pages) (would expand authority of Commodity Futures Trading Commission over certain kinds of financial swap deals and prescribes specific clearing regulations and other regulation)[summary here]

UPSHOT

With this kind of legislative energy, you can be sure another crisis like the one gripping us will never happen again!  (But you can also be sure others will.)

As CNET reports, “Independent bloggers who fail to disclose paid reviews or freebies can face up to $11,000 in fines from the Federal Trade Commission, according to revisions to [...]]]> As I argue in my essay Individual Branding the web presents important and amazing new possibilities for individuals to earn money and much of that potential will flow from one’s online reputation. In short, as one blogs or shares information in another form, one becomes a trusted source and can start extract money from those activities. I argue that those acts have the seeds of the possible destruction of Benkler’s world of sharing. Today the FTC has targeted a practice that arguably could increase the reliability of social network endorsements but will also upset many people.

As CNET reports, “Independent bloggers who fail to disclose paid reviews or freebies can face up to $11,000 in fines from the Federal Trade Commission, according to revisions to the agency’s “Guides Concerning the Use of Endorsements and Testimonials in Advertising” published Monday.” The FTC has not updated the Guidelines since 1980. The press release is here. The full text of the Guides are here (pdf). It is 81 pages, and I have not read it as yet but one thing people should know is that the effective date is December 1, 2009.

From the release it appears that the guides take am expansive view of what presents a moment to disclose “The revised Guides specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service.” CNET suggests that celebrities and “mommy bloggers” could be in trouble under the new rules. (Here is my prediction on the riposte to come but that I don’t think is accurate: “The FTC hates moms. In a down economy and with more and more people needing new ways to earn, the FTC actions are a direct attack on the importance of moms.” Now back to our regularly scheduled blogging.)

There are a ton of oddly connected things here. First, I just blogged about CITP and its FedThread project. That project would allow one to track this sort of moment rather quickly. Second, I was just at the Works In Progress Intellectual Property Conference at Seton Hall (which was yet again an excellent conference and for which everyone at Seton Hall deserves many thanks) where Zahr Stauffer presented a fascinating paper called Novels for Hire: Branded Entertainment, Copyright and the Law that I think will have something to say about these changes. As one blog notes, the practice of giving journalists freebies is common. Zahr’s paper shows how advertising and novels have had a rather curious interaction over the years. I think the paper will help understand the way writing and advertising have co-existed in either good or bad ways at different times with the shift to blogging fitting in as part of that history. The paper should be available soon so keep an eye out for it.

Electronics and other big ticket items seem to be where the concerns are. I look forward to finding out whether book, film, and music reviewers have to tell readers whether they received a review copy of the book. In general if one only says nice things about a review subject, one might receive more books etc. I think that non-professional blogs and other online information sources such as rating systems and FaceBook will allow people to find out whether they should buy a product (i.e., one might use a personal network to ask whether a product is good). That practice could undercut the quiet payment model.

Here is a possible way to understand this turn of events. 1) Secret endorsements die out and full disclosure of what has been given is the norm. 2) Small bloggers and big agencies are no longer able to seem credible as reviewers. 3) If people want independent reviews, they must pay magazines or other pay sources who can afford to buy the review items and avoid the taint of being given free stuff. 4) The public does not want to pay and instead reads the blog reviews with the disclosures and augments the research with social networks and user ratings which are more difficult to fake and possibly more reliable. 5) Yet again paid, professional independent news and reviews seems to be squeezed out.

On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address [...]]]> Thanks to Dave Hoffman, who just completed a very successful visit at Cornell Law School, for inviting me to be a guest blogger for the month. Maureen O’Rourke, the Associate Reporter on the Principles of the Law of Software Contracts, and I are posting the following to acquaint readers with the Principles and also to respond to some criticism of one section of the Principles that creates, under certain circumstances, an implied warranty of no known material hidden defects in the software.

On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address issues including contract formation, the relationship between federal intellectual property law and private contracts governed by state law, the enforcement of contract terms governing quality and remedies, the meaning of breach, indemnification against infringement, automated disablement, and contract interpretation.

The Introduction to the Principles explains further that “[b]ecause of its burgeoning importance, perhaps no other commercial subject matter is in greater need of harmonization and clarification. . . . [T]he law governing the transfer of hard goods is inadequate to govern software transactions because, unlike hard goods, software is characterized by novel speed, copying, and storage capabilities, and new inspection, monitoring, and quality challenges.” Many of the rules of Article 2 of the UCC therefore apply poorly to software transactions or not at all, and the Principles are intended to fill the void.

The Principles are not “law,” of course, unless a court adopts a provision. Courts can also apply the Principles as a “gloss” on the common law, UCC Article 2, or other statutes. Nor do the Principles attempt to set forth the law for all aspects of a transaction, but instead rely on sources external to the Principles in many areas.

The Principles apply to agreements for the transfer of software or access to software for a consideration, i.e., software contracts. These include licenses, sales, leases, and access agreements. The project does not apply to the exchange of digital media or digital databases. It applies a predominant purpose test to determine applicability to transactions involving embedded software or software combined in one transfer with digital media, digital databases, and/or services.

We are the Reporter and Associate Reporter of the software principles. We have been greatly aided by our advisors, consultative group members, ALI Council members, liaisons from the National Commissioners on Uniform State Law, Business Software Alliance, and the American Bar Association, and many additional lawyers from industry and other groups who, over the last five and one-half years, have met with us, talked with us on the phone, and exchanged e-mails with us. We believe the project moved along smoothly largely because of the efforts of all of these groups and individuals.

Nevertheless, in the two weeks leading up to approval in May, we received communications from a few software providers evidencing concern largely with one section of the Principles. Section 3.05(b) creates a non-excludable implied warranty that the software “contains no material hidden defects of which the transferor was aware at the time of the transfer.” The section only applies if the transferor receives “money or a right to payment of a monetary obligation in exchange for the software.” Because the section may be the most controversial provision, we devote the rest of this post to the issue.

Despite concerns that section 3.05(b) creates “new law,” it simply memorializes contract law’s disclosure duties and tort’s fraudulent concealment law. The section makes clear that these rules apply to software transfers in order to allocate the risk to the party best able to accommodate or avoid the costs of materially defective software. Obviously this is the transferor in situations where only it knows of the material defect and the transferee cannot protect itself. The section requires that the transferor knows of the defect at the time of the transfer (negligence in not knowing is not enough to trigger liability), the defect is material, and it is hidden.

A few software providers have concerns that the concepts of “hidden,” and “material defect” are obtuse and will “increase litigation” or require a flood of “detailed notices” to prospective users. These concepts, however, are hardly unknown to the law. A comment to section 3.05(b) says that a “hidden” defect occurs if the “defect would not surface upon any testing that was or should have been performed by the transferee.” This is nothing new. See, e.g., UCC 2-316(3)(b) (”there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to [the buyer]“).

A few software providers also worry about the meaning of “material defect.” The comments to section 3.05(b) point out that the section simply captures the principle of material breach: Does the defect mean that the transferee will not get substantially what it bargained for and reasonably expected under the contract? The criticism that “materiality” is too vague, if accurate, would mean that contract law would have to abolish its material breach doctrine too.

Putting together the requirements of actual knowledge of the defect at the time of the transfer, that the transferee reasonably does not know of the defect, and that the defect constitutes a material breach means that a transferor would be insulated from liability in situations identified by the concerned software providers as problematic. These include where the transferor has received reports of problems but reasonably has not had time to investigate them, where the transferee’s problems are caused by uses of which the transferor is unaware, where the transferor learns of problems only after the transfer, and where the problems are benign or require reasonable workarounds to achieve functionality. The best example of when section 3.05(b) would apply is, as comment b to the section says, where the transferor already knows at the time of the transfer that the software will require “major workarounds . . . and cause[] long periods of downtime or never [will] achieve[] promised functionality,” the transferee cannot discover this for itself, and the transferor chooses not to disclose the defect.

As we have already said, the section simply memorializes existing law. Under the common law, a contracting party must disclose material facts if they are under the party’s control and the other party cannot reasonably be expected to learn of the facts. Failure to disclose in such circumstances may amount to a representation that the facts do not exist and may be fraudulent. See, e.g., Shapiro v. Sutherland, 76 Cal. Rptr. 2d 101, 107 (Cal. Ct. App. 1998) (”Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.”); Hill v. Jones, 725 P.2d 1115, 1118-19 (Ariz. Ct. App. 1986) (”[U]nder certain circumstances there may be a ‘duty to speak.’ . .  . N]ondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. . . . Thus, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation.”). The Restatement (Second) of Contracts section 161(b) states that “[a] person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist . . . where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Section 161, comment d of the Restatement (Second) adds “In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected to disclose the fact that would correct the mistake. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such character as would probably prevent the buyer from buying at the contract price.”

One concern of a commentator is that fraudulent concealment is a tort, implying that it has no place in the Principles. But the principle appears prominently in the Restatement (Second) of Contracts section 161. And why not memorialize a principle that discourages a party in a contract setting from hiding material facts that the other party reasonably does not know? The commentator notes that fraudulent concealment requires intent to deceive, but wouldn’t that be the usual inference if a transferor licenses software it knows is materially defective and knows the transferee cannot discover it?

A few organizations also are concerned that section 3.05(b) cannot be disclaimed. But there are plenty of cases that do not allow a party to contract away liability for concealment. One critic wonders why a statement such as “I am not giving any assurances about there being no defects in this software,” should not insulate a transferor from liability. A reasonable licensee, assuming the good faith of the licensor, would believe that this licensor does not intend to make any express warranties or implied warranties of merchantability or fitness, not that the licensor knows that the software is materially defective so that the software will be largely worthless to the licensee. A transferor playing this game is surely in bad faith and, frankly, engaging in reprehensible conduct. But there is a way to ensure no liability under this section, namely to disclose material hidden defects. In effect, disclosure is the disclaimer.

Bob Hillman and Maureen O’Rourke
June 2, 2009

In this vein, I couldn’t resist posting an ad I came across last night that squarely raises these legal issues.  A company that appears to be [...]]]> President Obama is likely the first true “celebrity president”, at least the first in our time, in the sense that people see opportunities for making money from his persona and likeness.  Early on in the presidency, his office made some remarks to the extent that they were working on a policy asking people to be respectful of the president and his family in restraining some of these commercial impulses.  Of course, all of this raises the fine line between free speech and personality rights – a topic much debated on the cyberprof listserve in the early days of this presidency.

In this vein, I couldn’t resist posting an ad I came across last night that squarely raises these legal issues.  A company that appears to be in Michigan (although they do not give their postal address, but do require Michigan residents to pay sales tax on purchases from their website) has set up an “Obama shoes” website.  On this website, you can purchase Obama sneakers, backpacks, and basketballs.

The website uses video clips from one of Obama’s speeches and refers to itself as selling merchandise that is inspirational to young folks and that is intended to commemorate Obama’s inauguration. Thus, it obviously intends to juxtapose free speech interests in the inauguration against the commercial use of Obama’s name and likeness.

There are some other interesting little sidenotes about this business venture that suggest the people who set it up sought at least some legal advice before doing so.

1. They used the domain name “obamashoes.tv” presumably either because they couldn’t get a “better” domain name or because they wanted to avoid claims under the Uniform Domain Name Dispute Resolution Policy. They could argue that even if Obama’s name operates as a TM, they have not used his actual name in the domain name, but have added “shoes” to the end of it so no one will think it’s an authorized Obama website.

2. They include a disclaimer on their webpage to the effect that: “Obamashoes.tv is a private entity and makes no claim of affiliation or endorsement by President Barack Obama or his campaign for office.”

3. Interestingly, there is also a disclaimer on their FAQ page about the design of the sneakers themselves. “Q. Why does [sic] the shoes look like Nike Air Force Ones (AF1) and the Jordan Brand?
A. These design is [sic] been proven to be commonly preferred by most Adults & Children (black or white).” Now, I personally don’t know anything about sneaker designs, but I assume this is intended as a preemptive strike to ward of claims in trademark, trade dress, and/or design patent with respect to the actual design of the shoes.

So, interesting business model…
Legitimate free speech? Or intellectual property law infringement as far as they eye can see?

Superb guest blogger James Grimmelmann has offered thoughtful commentary on the proposed settlement and now is spearheading an open source initiative to garner public input on the [...]]]> As Frank and others have highlighted at CoOp, Google has been digitizing millions of books, including many covered by copyright, from the collections of major research libraries.  Robert Darnton describes Google’s book scanning project as nothing short of  an attempt to control access to the “single most comprehensive collection of books since the Library of Alexandria.”  Authors and publishers brought a class action suit against Google, alleging breach of copyright.  Judge Denny Chin is currently considering the class certification motion and the parties’ settlement proposal.  In response to wide-spread criticism of the proposed settlement, Judge Chin recently granted a four-month delay to allow more time for discussion and analysis of the proposal.

Superb guest blogger James Grimmelmann has offered thoughtful commentary on the proposed settlement and now is spearheading an open source initiative to garner public input on the controversial proposed settlement.  Later this month, Grimmlemann will introduce “The Public Index,” a website that will feature discussion forums, a comprehensive archive of settlement documents and related commentary, and a tool for users to insert their analysis and commentary on individual paragraphs of the proposed settlement.  Although the website responds to a lawsuit, it ultimately can provide Congress and agencies insight into the issue should the court reject the settlement.

The proposed settlement raises issues of great importance, from the contours of the fair use principle and Google’s potential monopoly over the largest digital library (remniscent of Frank’s testimony concerning the failed Google-Yahoo deal) to the  absence of due process protections of orphan works (i.e., works for which it is impossible to locate the appropriate rights holders to seek permission to digitize) whose rights would be adjudicated if the class is certified and settled.  This description merely touches the surface of the issues at stake.  Pamela Samuelson has important commentary on the issue as do many others.  Suffice it to say that the Public Index Initiative will no doubt be an important resource for the court (and possibly the legislature) in addressing this perplexing issue.

Believe me, no. I thank my fortune for it

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year.

Therefore my merchandise makes me not sad. (I.i.41-45)

Having ignored the problem of fat tails and black swans, Antonio decides to engage in [...]]]> Over the weekend, I re-read A Merchant of Venice, and I was struck by the fact that Shakespeare manages to include in the play virtually every element of the current financial crisis. Scene one begins with a discussion of risk assessment, and Antonio’s belief that he has managed to tame the vagaries of commercial fate through diversification. Asked by Salarino if he “Is sad to think upon his merchandise” (I.i.40), Antonio responds:

Believe me, no. I thank my fortune for it

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year.

Therefore my merchandise makes me not sad. (I.i.41-45)

Having ignored the problem of fat tails and black swans, Antonio decides to engage in a bit of dodgy finance. He borrows in the wholesale market from Shylock under terms that appear favorable, but have a huge downside in the unlikely event of his default. Antonio, of course, is unconcerned. From his point of view he is getting cheap money by taking on what seems like an extremely remote risk. He then takes these borrowed funds and uses them to make what can only be described as a no doc, subprime loan. Bassiano wants money for a speculative venture — the wooing “In Belmont [of] a lady richly left” (I.i.161) — and Antonio agrees, in effect renting out his credit rating:

Try what my credit in Venice can do;

That shall be racked even to the uttermost

To furnish thee to Belmont to fair Portia.

Go presently inquire, and so will I,

Where money is; and I no question make

To have it of my trust or for my sake. (I.i.180-185)

Shylock, for his part, does not approve of the loose monetary policy in Venice, which he rightly blames on wild lending practices, such as Antonio’s loans:

How like a fawning publican he looks.

I hate him for he is a Christian;

But more, for what is low simplicity,

He lends out money gratis and brings down

The rate of usance here with us in Venice. (I.iii.38-42)

Faced with such low returns on normal loans, Shylock is forced into the shadowy world of loan-to-own, in this case targeting, as he tells Antonio, “…an equal pound/ Of your fair flesh, to be cut off and taken/ In what part of your body pleaseth me” (I.iii.147-149). As he later reveals, Shylock is engaged in a bit of arbitrage in the commodity markets and wants Antonio’s flesh “To bait fish withal” (III.i.49).

When all Antonio’s “argossies” reportedly wreck at the same time — a wildly improbable event predicted by none of Antonio’s complex statistical models and, as we have seen, completely discounted by him — his over-leveraged balance sheet sends him spinning into bankruptcy and ruin. For his part, after Lorenzo makes off Madoff-like with Shylock’s daughter and his savings — “A diamond gone cost me two thousand ducats in Frankfurt!” (III.i.77-78) — he is left to lament (albeit in prose):

Why thou loss upon loss! The thief gone

with so much, and so much to find the thief, and no

satisfaction, no revenge, nor no ill luck stirring but

what lights o’ my shoulders, no sighs but o’ my breath-

ing, no tears but ‘o my shedding. (III.i.85-89)

Of course, once his ill-fated bet on Bassiano and the power of risk management starts to unwind, Antonio’s surrogates begin lobbying the government to change the rules so as to avoid unwanted contracts. To his credit, the Duke resists these entreaties, because, as Antonio acknowledges:

The duke cannot deny the course of law;

For the commodity that strangers have

With us in Venice, if it be denied,

Will much impeach the justice of the state,

Since that the trade and profit of the city

Consisteth of all nations. . . . (III.iii.26-31)

His laudable concern for the commercial reputation of Venice, however, does not prevent the Duke from using the bully pulpit in an attempt to brow-beat Shylock into renegotiating his contract with Antonio:

Shylock, the world thinks, and I think so too,

That thou but leadest this fashion of they malice

To the last hour of act; and then ’tis thought

Thou’lt show thy mercy and remorse more strange

That is they strange apparent cruelty’

And where thou now exacts the penalty,

Which is a pound of this poor merchant’s flesh,

Thou wilt not only loose the forfeiture,

But touched with human gentleness and love,

Forgive a moiety of the principal,

Glancing an eye of pity on his losses,

That have of late so huddled on his back,

Enow to press a royal merchant down

And pluck commiseration of his state

From brassy bosoms and rough hearts of flint,

From stubborn Turks and Tartars never trained

To offices of tender courtesy.

We all expect a gentle answer, Jew. (IV.i.16-34)

The Duke’s speech, of course, falls into the standard rhetorical tropes from the perennial battle between Main Street and Wall Street, finance and the “real economy.” Shylock is asked to forgive the principal out of “human gentleness and love” and Antonio’s unfortunate losses “huddled on his back,” nevermind, of course, that it was Antonio who got himself into the problem with the first place through irrational exuberance and shoddy lending practices. Of course, beneath the velvet appeal to mercy and solidarity there is the steel fist of an unstated threat. Shylock is “Jew,” the member of a hated minority and the memory of young men following him through the streets taunting him over the loss of his daughter just a few scenes before must be fresh in his memory. The duke is willing to stand behind the “justice of the state,” but for how long in the face of an increasingly belligerent public that his sided decisively with Antonio?

Of course, the story is resolved when deus ex machina Portia arrives with clever legal arguments that allow Antonio to escape his obligations while giving the city a fig leaf behind which it can hide its ultimately thin commitment to contractual sanctity. (Of course, realist that I am, in the end I think that that it is Portia’s rhetoric — “The quality of mercy is not strained…” (IV.i.182) — rather than her legal analysis that does the real work.) The ending, however, requires the forced conversion of Shylock and what amounts to public control of his capital through a series of strong-arm negotiations rather than outright legislation.

Needless to say, finance and capitalism will never be the same in Venice again. With Antonio and his friends in control, I shudder for the prospects of efficient capital allocation in the future. I think that we can expect more loans to well-connected folks like Bassanio with questionable business models.

[T}he failures are rooted in recurring themes: agency appointees selected primarily for ideology and loyalty, rather than competence; agency heads who overruled staff experts and suppressed reports that did not coincide with administration philosophy; agency-industry collusion; [...]]]> I have tried to keep track of executive failures over the past eight years in financial, health, and safety regulation. But I have been overwhelmed. As James Galbraith argues in The Predator State, the past administration appointed the most extreme anti-regulatory voices it could find, across the board. Now the Center for Public Integrity has released a report on the results: the “eight-year tenure of the Bush administration was marked by more than 125 systematic failures across the breadth of the federal government.” As they note,

[T}he failures are rooted in recurring themes: agency appointees selected primarily for ideology and loyalty, rather than competence; agency heads who overruled staff experts and suppressed reports that did not coincide with administration philosophy; agency-industry collusion; a bedrock belief in the wisdom of deregulation; extensive private outsourcing of public functions; a general failure to exercise government’s oversight responsibilities; and severely slashed budgets at understaffed agencies that often left them unable to execute basic administrative functions.

The question now is, what to do about it? Responding to the administration’s torture policies and other human rights violations, Jack Balkin and Bruce Ackerman have suggested two approaches. Both of them are worth looking into with respect to some Bush-era holdovers who will be on independent agency boards for years to come.

Ackerman argues that federal judge Jay Bybee should be impeached because of his role in the politicization of the OLC:

When he was promoted to head the Justice Department’s Office of Legal Counsel, he became the final judge of legal matters within the executive branch. Yet his opinion on torture was so poorly reasoned that it was repudiated by his very conservative successor, Jack Goldsmith.

Under the Constitution, impeachment requires a finding of “high crimes and misdemeanors.” This is a high standard. Although Bybee’s opinion fails minimum tests of legal competence, he may have acted in good faith. This should protect him from conviction. But his legal distortions might also be evidence of the abdication of his fundamental legal responsibilities. Instead of engaging in a good-faith interpretation of the War Crimes Act and the Geneva Conventions, he may have merely been responding to political pressures from the White House to liberate the CIA and the military from the rule of law.

The lines between strained interpretations, incompetence, and intentional wrongdoing can be fine. But anyone familiar with the Supreme Court’s discussion of the term “modify” in the ATT v. MCI decision can grasp the limits of agency authority. Agency leadership appointed by Bush (and especially those burrowed in) should be held accountable for crossing that line.

Unfortunately, given the downward spiral of the economy, impeachment proceedings for such players would likely just distract from pressing business at hand. That’s where Jack Balkin’s idea of “Truth and Repudiation” commissions may come in handy. We need to illuminate exactly how industry ties influenced critical decisions in the Bush administration–and how its administrative leaders and allies get rewarded for those decisions later on.

I believe that our economic recovery may well depend on the emergence of commissions like Pecora’s in response to an utterly corrupted financial order. Ordinary citizens increasingly feel that Wall Street is a shell game, and they are becoming reluctant to invest in anything. We need to fully understand and shame the players who racked up incredible wealth from schemes that skirted the very edge of fraudulence. When criticized, finance leaders now enjoying tens of millions of dollars in bonuses tend to plead, “Well, everything we did was legal.” Perhaps so, but if ordinary citizens believe it can happen again, all dreams of a democratized investor class are kaput.

PS: Charles Fried wins the “setting high standards for our leaders” award:

If you cannot see the difference between Hitler and Dick Cheney, between Stalin and Donald Rumsfeld, between Mao and Alberto Gonzales, there may be no point in our talking.

PPS: Hat tips to Brian Leiter and Frank Rich.

Payday lenders are spending millions of dollars to back ballot initiatives that challenge state restrictions on their cash-advance practices. . . . [In Arizona], Yes on 200 is financed by the local affiliate of the Community Financial Services Association, a national payday-lending group. . . . . [T]he wording of the ballot initiative suggests it would impose further regulation on payday lenders; in fact, it would roll back much tougher rules. Yes on 200 is promoting the initiative with a counterintuitive strategy: spending money on ads that depict payday lenders as unscrupulous. One ad says, “Arizonans [...]]]> Who’d guess that my worries about the political power of the financial sector and Jaya’s concerns about misleading ballot initiative wording would converge? Easha Anard reports on the trend:

Payday lenders are spending millions of dollars to back ballot initiatives that challenge state restrictions on their cash-advance practices. . . . [In Arizona], Yes on 200 is financed by the local affiliate of the Community Financial Services Association, a national payday-lending group. . . . . [T]he wording of the ballot initiative suggests it would impose further regulation on payday lenders; in fact, it would roll back much tougher rules. Yes on 200 is promoting the initiative with a counterintuitive strategy: spending money on ads that depict payday lenders as unscrupulous. One ad says, “Arizonans agree: Payday lenders who rip off hard-working Americans need to be stopped,” and asks voters to support the ballot initiative.

Now those are people you can trust! No regulation needed for them.

I wonder if Bryan Caplan would consider those who want to regulate payday lending financial illiterates–and approve this “noble lie” as a way of promoting better policy?

This week in my Article 9 class we went over the rules governing security interests in consumer purchases. The interesting thing about this material is that the standard hypothetical — I buy a refrigerator on credit from the department store — is an anachronism. Today, if I am going to finance the purchase of a big-ticket consumer good, I [...]]]> It is pretty easy to find dire statistics about credit cards in America. Frankly, the financial puritan in me likes it when I see another news story denouncing over-leveraged American consumers and the sad erosion of thrift and delayed gratification. Bring on the jeremiads! On the other hand, I realize that there is an important sense in which these statistics are misleading.

This week in my Article 9 class we went over the rules governing security interests in consumer purchases. The interesting thing about this material is that the standard hypothetical — I buy a refrigerator on credit from the department store — is an anachronism. Today, if I am going to finance the purchase of a big-ticket consumer good, I don’t get a loan from the J.C.Penny finance department. I charge it. Indeed, even if Target or Home Depot wants to finance my purchase I don’t go to the lending office at the back of the store. I get a Target credit card. Of course, some of these charge cards — I am told — claim a security interest in the goods purchased with them. On the other hand, I suspect that the Walker-Thomas days of a retailer who repos the cross-collateralized big stereo sets are as obsolete as, well, big stereo sets. In other words, we now have more credit card debt in part because credit cards have replaced virtually all other forms of consumer finance.

This, of course, makes economic sense as well. The biggest benefit of secured credit does not come from the reduction of risk. Miller and Modigliani long ago taught us to be skeptical of this story. The unsecured creditors ought adjust their interest rates to accommodate the risk created by secured creditors and the over all effect on the cost of capital will be a wash. Of course, this is far from entirely true — there are non-adjusting creditors like tort victims and trade creditors. On the other hand, I’m skeptical that secured credit exists mainly as a vehicle for lowering financing costs through increases in risky behavior.

Rather, the story on secured credit is that it reduces monitoring costs by providing a legal technology that reduces the need for creditors to constantly watch their debtors’ every move. Credit cards are also based on monitoring technology, but in their case the technology is . . . well . . . technology, in particular, computers, low-cost credit reporting, and the law of large numbers. In other words, the information technology of credit cards is a substitution for the legal technology of secured credit, and on many fronts it seems that legal technology is losing the race. Hence — at least in part — the rise in credit card debt.

It would seem, however, that credit cards may be moving in to replace not only the old consumer finance departments, but now ordinary commercial lending as well. According to the NYT:

Just as the slowing economy has made access to cash a higher priority for a lot of small businesses, banks have become more reluctant to extend traditional lines of credit to those businesses, experts say. But banks have been offering “small business” credit cards.

Bank cards and lines of credit both offer money when it is needed, but there is a fundamental difference: lines of credit have low, fixed interest rates or slow-moving, variable ones, while interest rates on credit cards can jump unpredictably.

Hardly an encouraging trend, although I suspect that the unpredictability of credit cards can be overstated. To be sure, if you miss your payments regularlly the combination of changing interest rates, penalty fees, and the like gets very bewildering very fast. On the other hand, if you are a good credit risk that subprime-spooked banks just won’t lend to, then credit cards may not be a horrible way of providing short term liquidity. Longer term credit card loans, however, get my inner puritan fired up.

A person is guilty of a misdemeanor of the third degree if he pretends for gain or lucre, to tell fortunes or predict future events, by cards, tokens, the inspection of the head or hands of any person, or by the age of anyone, or by consulting the movements of the heavenly bodies, or in any other manner, or for gain or lucre, pretends to effect any purpose by spells, charms, necromancy, or incantation, or advises the taking or administering of what are commonly called love powders [...]]]> According to the WashPo, St. Johnsbury, Vermont has decided to make the plunge and legalize soothsaying. It turns out that a number of jurisdictions still have anti-fortunetelling statutes on the books. Contemporary Pennsylvania law, for example states:

A person is guilty of a misdemeanor of the third degree if he pretends for gain or lucre, to tell fortunes or predict future events, by cards, tokens, the inspection of the head or hands of any person, or by the age of anyone, or by consulting the movements of the heavenly bodies, or in any other manner, or for gain or lucre, pretends to effect any purpose by spells, charms, necromancy, or incantation, or advises the taking or administering of what are commonly called love powders or potions, or prepares the same to be taken or administered, or publishes by card, circular, sign, newspaper or other means that he can predict future events, or for gain or lucre, pretends to enable anyone to get or to recover stolen property, or to tell where lost property is, or to stop bad luck, or to give good luck, or to put bad luck on a person or animal, or to stop or injure the business or health of a person or shorten his life, or to give success in business, enterprise, speculation, and games of chance, or to win the affection of a person, or to make one person marry another, or to induce a person to make or alter a will, or to tell where money or other property is hidden, or to tell where to dig for treasure, or to make a person to dispose of property in favor of another. (18 Pa.C.S.A. § 7104 )

The law apparently dates back to an 1861 state statute. A quick Westlaw search reveals reported cases dealing with anti-fortunetelling statues in California, Illinois, Maryland, New York, Washington, and other states.

Witchcraft and cursing, of course, were crimes at common law on the straight-forward theory that they were a method of harming others that ought to be suppressed. One may dispute the metaphysics behind this crime, but as a normative matter it seems simple enough. One might even object to love potions as a kind of officious intermeddling. The suppression of fortunetelling — along with other forms of beneficent magic like peering in stones to find lost treasure — however, rests on a more subtle calculation, some of it less than pretty.

From the reported cases that I glanced through, it seems that in the early twentieth century these laws were used mainly against Gypsies or immigrants of Eastern or Southern European extraction, suggesting a definite ethic bias at work. In the nineteenth century, the concern was with home grown American conjuring. Folk magic, of course, was an important part of life among the rural poor in the 19th century. Village rodsman and glass peepers would hire themselves out to find water, lost objects, or buried treasure. To local elites, of course, this stuff was the vilest — and most embarrassing — superstition, which had to be suppressed. In some cases the argument was fraud, although often the customers of local magicians were not the one’s pressing charges. The real impetus was the suppression of superstition.

There is also a religious element here. I found a 1927 Pennsylvania case holding that faith healing and trafficking in biblical predictions did not come under the statutory definition of “fortune telling.” In the early 19th century, however, there was little — if any — distinction among the rural poor between “magic” and “religion,” Indeed, the category of magic was in large part the creation of (Protestant) anthropologists in the late 19th century who wished to distinguish respectable “religion” from mere “superstition.”

So is there a case to be made for the prohibition of fortune telling in the modern world? One can certainly imagine cases of fraud, but it is also not unreasonable to simply impose a rule of caveat emptor on those that purchase magical services and leave it at that. There are also, it seems to me, potential first amendment concerns. I am not free speech expert, but it seems to me that the suppression of fortune telling necessarily involves a content-based speech restriction. Of course, this is commercial speech, but in at least some cases it is bound to be truthful, and even predictions that turn out to be mistaken need not be fraudulent. It is difficult to cast a horoscope properly and sometimes astrologers make innocent mistakes. There is also the free exercise claim. If fortune telling can be characterized as religion, then it seems to me that there is a very strong free exercise argument here. This is not a neutral or generally applicable law. The Pennsylvania, statute, for instance is aimed directly at fortune telling itself.

Needless to say, I await the cert petition.

(Image source: Wikicommons)

Federal Bureau of Investigation special agent Paul Artley filed an affidavit Aug. 14 in U.S. District Court in Sacramento, Calif., supporting the government’s April 16 seizure of nearly $600,000 held in the name of Rahal’s company, Intramark USA Inc., from two of his accounts in the Vineland, N.J. branch of Sun National Bank. The document alleges he used the accounts [...]]]> A reader passes along an interesting white collar crime story. In the latest development of an (apparently) long-running federal investigation,

Scott Salyer, president and chief executive officer of SK Foods, Monterey, Calif., a food processor and the parent company of Salyer American Fresh Foods Inc., is accused of allegedly encouraging New Jersey-based broker Randall Rahal to offer bribes to its customers’ buyers over a four-year period.

Federal Bureau of Investigation special agent Paul Artley filed an affidavit Aug. 14 in U.S. District Court in Sacramento, Calif., supporting the government’s April 16 seizure of nearly $600,000 held in the name of Rahal’s company, Intramark USA Inc., from two of his accounts in the Vineland, N.J. branch of Sun National Bank. The document alleges he used the accounts to bribe buyers from a number of food companies.

I tracked down that affidavit. A highlight, from my perspective, comes in paragraph 23:

“Witness #1 stated RAHAL told Witness #1 and others that he identifies the customers that he can get to take bribes by dropping a $100 bill and picking it up and saying, ‘You must have dropped this, is it yours?; If the individual says ‘yes,’ RAHAL knows that they are open to a ‘business offer.’ Witness #1 understood ‘business offer’ to mean bribe.”

There are other juicy bits, as this storynotes, including this one:

In one phone conversation between Salyer and Rahal, the broker tells the SK chief a buyer is “gonna need a retirement program. So, it’s a perfect fit for me.”

Salyer asks, “How fast are you going to reel in that fish?”

Rahal, referring to a dinner meeting he has set up with the buyer, says, “Probably by the time the coffee comes.”

An enthusiastic Salyer replies, “I want that sucker on speed reel.”

Apart from the local color, the story is interesting because it goes to the heart of the situationalist v. dispositionalist explanation of criminality so often discussed over at The Situationalist. Were the folks who accepted Rahal’s bribes disposed toward corruption, or did his temptation make them act in ways they never otherwise would have? It’s a question that bears on our attributional assumptions and the ways we punish. For what it’s worth, I suspect that Rahal’s test is one that many, many of us would fail.

(Image Source: Wikicommons)

This Article presents newly discovered archival evidence demonstrating that government lawyers told a crucial lie to the United States Supreme Court in the case of Hirabayashi v. United States, 320 U.S. 81 (1943), which upheld the constitutionality of a racial curfew imposed on Japanese Americans in World War II. While the government’s submissions in Hirabayashi maintained that the curfew was a constitutional response to the serious threat of a Japanese invasion of the West Coast, new archival findings make clear that military officials foresaw no Japanese invasion and were planning for no such thing at the time they [...]]]> Professor Eric Muller (U. North Carolina School of Law) has posted a new paper, Hirabyashi: The Biggest Lie of the Greatest Generation on SSRN. From the abstract:

This Article presents newly discovered archival evidence demonstrating that government lawyers told a crucial lie to the United States Supreme Court in the case of Hirabayashi v. United States, 320 U.S. 81 (1943), which upheld the constitutionality of a racial curfew imposed on Japanese Americans in World War II. While the government’s submissions in Hirabayashi maintained that the curfew was a constitutional response to the serious threat of a Japanese invasion of the West Coast, new archival findings make clear that military officials foresaw no Japanese invasion and were planning for no such thing at the time they ordered mass action against Japanese Americans. Even more disturbingly, the archival record demonstrates that at the time that Justice Department lawyers filed their brief in Hirabayashi emphasizing a threatened invasion, they knew this emphasis was false.

The Article seeks to understand what might have led otherwise ethical Justice Department lawyers to present such a big and consequential lie, suggesting that the then-prevalent racial schema of the “Oriental” as an invading horde may have overpowered the lawyers’ evaluation of the facts. And perhaps more importantly, the Article demonstrates that the Hirabayashi decision – which has never been repudiated in the way that the more famous Korematsu decision has been, and which remains a potent precedent for race-conscious national security measures – deserves to be installed in the Supreme Court’s Hall of Shame, alongside Korematsu, Dred Scott, and the Court’s other biggest mistakes.

According to Eric’s blog post about his article: “My article documents all of this from primary archival sources, and then goes on to speculate about what might have led Justice Department lawyers to such a large and consequential deception.”

An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. . . .African Americans spend much less on education, health care, entertainment, and home furnishings. (The same is true of Latinos.)

[E]conomists [have] compared the spending patterns of people of the same race in different states—say, blacks in Alabama versus blacks in Massachusetts, or whites in South Carolina versus [...]]]> I was intrigued by Virginia Postrel’s latest article on conspicuous consumption. In her book The Substance of Style, Postrel seemed eager to discredit Veblen-inspired thought by claiming that it failed to “credit [luxury] goods’ intrinsic sensory appeal.” Now her position is more nuanced:

An African American family with the same income, family size, and other demographics as a white family will spend about 25 percent more of its income on jewelry, cars, personal care, and apparel. . . .African Americans spend much less on education, health care, entertainment, and home furnishings. (The same is true of Latinos.)

[E]conomists [have] compared the spending patterns of people of the same race in different states—say, blacks in Alabama versus blacks in Massachusetts, or whites in South Carolina versus whites in California. [A]ll else being equal . . . an individual spent more of his income on visible goods as his racial group’s income went down. African Americans don’t necessarily have different tastes from whites. They’re just poorer, on average. In places where blacks in general have more money, individual black people feel less pressure to prove their wealth.

The same is true for whites. Controlling for differences in housing costs, an increase of $10,000 in the mean income for white households—about like going from South Carolina to California—leads to a 13 percent decrease in spending on visible goods. “Take a $100,000-a-year person in Alabama and a $100,000 person in Boston,” says Hurst. “The $100,000 person in Alabama does more visible consumption than the $100,000 person in Massachusetts.” That’s why a diamond-crusted Rolex screams “nouveau riche.” It signals that the owner came from a poor group and has something to prove. . . . Rich people in poor places want to show off their wealth. And their less affluent counterparts feel pressure to fake it, at least in public. Nobody wants the stigma of being thought poor. [emphasis added]

Nevertheless, Postrel is at pains to convey that positional pressures are but a temporary problem. . . .

[This research] suggests why emerging economies like Russia and China, despite their low average incomes, are such hot luxury markets today—and why 20th-century Texas, a relatively poor state, provided so many eager customers for Neiman Marcus. . . Nobody wants the stigma of being thought poor. Veblen was right.

But he was also wrong. Or at least his theory is out of date. Given that the richer your group, the less flashy spending you’ll do, conspicuous consumption isn’t a universal phenomenon. It’s a development phase. It declines as countries, regions, or distinct groups get richer. “Bling rules in emerging economies still eager to travel the status-through-product consumption road,” the market-research group Euromonitor recently noted, but luxury businesses “are becoming aware that bling isn’t enough for growing numbers of consumers in developed economies.” At some point, luxury becomes less a tool of public status competition and more a means to private pleasure.

My question is–is Veblen’s theory really “out of date,” or merely limited to parts of the world less developed than, say, 21st century Texas? If the latter, then isn’t Veblen’s theory of luxury as display more generally applicable than Postrel’s theory of luxury as “private pleasure?” Certainly the idea of luxury is complex. But if standards of living for the developed world’s lower and middle classes stagnate or decline, I have a sense that Veblen’s theory will have more explanatory power even in the places where Postrel thinks it’s fading. As I’ve noted before, it’s hard to imagine an egalitarian glamor.

Photo Credit: Cobalt123, $9,000 Mont Blanc Pope Julius II Pen.

A recent scholarly paper by economists Alberto Alesina and Edward Glaeser of Harvard University and Bruce Sacerdote of Dartmouth College found that countries tend to build large welfare states when citizens believe that success in [...]]]> How do we explain the divergence between the US and so many other developed countries when it comes to social welfare issues? I looked at the issue last year, noting Spencer Overton’s conclusion that “Less than one percent of the U.S. population makes financial contributions over $200 to federal candidates, and . . . [o]f those who contribute over $200, approximately 85 percent have household incomes of $100,000 or more. . . .” Now Scott Ganz and Kevin Hassett propose that youth sports may actually be driving the difference:

A recent scholarly paper by economists Alberto Alesina and Edward Glaeser of Harvard University and Bruce Sacerdote of Dartmouth College found that countries tend to build large welfare states when citizens believe that success in life is largely determined by luck. . . . Americans are remarkably different from Europeans in this regard. If you ask Americans whether the economically disadvantaged are poor because they are lazy or unlucky, 60 percent say lazy. If you ask Europeans, only 26 percent finger laziness. Alesina and his colleagues argue that these attitudes shape society by shaping governmental and social institutions.

But why do these attitudes exist? A big part of the answer may be found in sports. A 1999 study by developmental psychologists Françoise D. Alsaker and August Flammer found American children spend more time participating in athletics than Europeans. In certain cases—America compared with France, for instance—the gap is quite substantial. A 1996 study by Michigan State University sports psychologist Martha E. Ewing and Vern D. Seefeldt, former director of the Institute for the Study of Youth Sports, found that 45 percent of all eligible American youths play in an agency-sponsored league, like Little League baseball or Pop Warner football. That is 22 million children each year who get an infusion of the American work ethos.

I am so glad that US children are spending more time on sports and less on trivialities like physics, foreign languages, or math. Otherwise they might subscribe to such troublingly European ideals as the difference principle, global warming, or the four freedoms.

Admittedly, I have to attribute my own distrust of cultural explanations to time spent at Oxford, where the dons cautioned against resorting to culture as an explanatory variable until you understood the politics, economics, and institutions it’s surrounded by. To begin thinking about why the US is such an outlier in social welfare policy, we might want to look at the work of international scholars (like Kieke Okma) who’ve done much to enhance our understanding of comparative health systems. We might also want to revisit the scorched earth politics of the 1990s.

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the [decades leading up to the subprime meltdown]. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to [...]]]> A few months ago I worried that many subprime borrowers were concerned parents terrified of losing a bidding war for places in good school districts. Today Robert H. Frank, with his usual perspicuity, explains that dynamic in a concise and convincing op-ed:

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the [decades leading up to the subprime meltdown]. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Todd Zywicki faults Frank for failing to acknowledge that rising tax burdens have caused middle income families to lose as much (or perhaps more) financial ground as a home finance arms race. I hope that Prof. Zywicki will take a look at the proposed progressive consumption tax at the end of Frank’s book Falling Behind, which would likely address many of his concerns. We might also query why recent administrations have done so much to alleviate the tax burden of the top 1% and 0.01% of taxpayers, while doing relatively little to reduce the tax burden of the vast middle class. Frank’s work has consistently faulted those policies.

Of course, if school district quality were not so disparate, the desperation that fueled the subprime spree may not have been so intense. But given the stranglehold big donors have over the legislative process currently, I don’t expect the US to move in a Finnish direction any time soon.

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even [...]]]> As we deal with the consequences of housing and consumption arms races, Elizabeth Warren’s article on “Making Financial Products Safer” is a must-read. Warren notes:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?

Warren proposes that a new federal agency start regulating credit from a consumer safety perspective:

[W]hy not create a Financial Product Safety Commission (FPSC), charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new products for safety, and require modification of dangerous products before they can be marketed to the public? The agency could review mortgages, credit cards, car loans, and so on. It could also exercise jurisdiction over life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks that make some of them far more dangerous than others, and ensure that none pose unacceptable risks to consumers.

An FPSC would promote the benefits of free markets by assuring that consumers can enter credit markets confident that the products they purchase meet minimum safety standards. A commission could collect data about which financial products are least understood, what kinds of disclosures are most effective, and which products are most likely to result in consumer default. It could develop nuanced regulatory responses; some credit terms might be banned altogether, while others might be permitted only with clearer disclosure. A commission could promote uniform disclosures that make it easier to compare products, and to discern conflicts of interest on the part of a mortgage broker or seller of what are now loosely regulated products. For example, an FPSC might review the following terms that appear in some—but not all—credit-card agreements: universal default clauses; unlimited and unexplained fees; interest-rate increases that exceed 10 percentage points; and an issuer’s claim that it can change the terms after money has been borrowed. It would also promote such market-enhancing practices as a simple, easy-to-read paragraph that explains all interest charges; clear explanations of when fees will be imposed; a requirement that the terms of a credit card remain the same until the card expires; no marketing targeted at college students or minors; and a statement showing how long it will take to pay off the balance, as well as how much interest will be paid if the customer makes the minimum monthly payments on the outstanding loan balance.

As I’ve noted here and here, the federal CPSC may not exactly be a model here. It could easily turn into one more preemption machine. But given the “race to the bottom” dynamics common generally, federal regulation may be the only solution.