Insights from Michael Barr
Jo Ann Barefoot
I am absolutely delighted to share today's episode -- my conversation with Michael Barr.
Most of our listeners know Michael as the former Assistant Treasury Secretary for Financial Institutions who shepherded the Obama administration's efforts on the Dodd-Frank financial reform law. Fewer people may know of his role in developing the proposal for, and negotiating the enactment of, the Consumer Financial Protection Bureau, which is when I got to know him. He is now back at the University of Michigan (my own alma mater) as a law professor, and continues to be very active across a wide spectrum of consumer finance and financial regulation activities, and also on lending to small businesses.
Michael has thought hard about the toughest challenges in consumer finance, drawing on both his government experience and his academic activities (among other things, he's a Rhodes Scholar). He also works extensively with innovators and nonprofits.
In our conversation he offers insights on some of the most critical topics facing consumer finance.
Perhaps the most central principle driving his ideas is behavioral economics - coming to grips with the reality that consumers are not perfectly rational, and don't have perfect information, in making financial decisions. "We ought to design both products and policy around the way human beings actually make decisions and behave," Michael tells me. See below for links to his research on this, including his paper "Behaviorally-Informed Regulation."
One result of his behavioral focus is a refreshing readiness to rethink consumer financial education. At one point he says, "just as we couldn't explain how our smartphones operate," financial consumers don't necessarily need to know how financial products are designed, in order to use them effectively. He thinks, as I do, that today's technology can create simple new tools that nearly anyone can use, whether they have a sophisticated financial education, or not.
Another issue he raises is his involvement in developing the "small business borrowers' bill of rights" (see our earlier podcast discussing this with Brian Graham of BancAlliance). There is growing concern that online small business lending is creating borrower risks as well as opportunities, especially as America shifts toward the so-called 1099 economy and more people run small businesses in ways that closely parallel consumer finance.
Michael also explores the challenge of crafting regulation that enables innovation while still blocking harm. He says regulators sometimes allow harmful practices to emerge and grow until they hit a "tipping point," at which point they drive industry standards so low that good companies can't survive without adopting activities they would rather avoid. I agree with him that this is a key challenge, especially as innovation accelerates. If regulators intervene too early and aggressively, we'll have the government designing our financial products, instead of the market doing so. On the other hand, if they are too passive or too late in addressing really harmful practices - especially if they wait until after that tipping point has actually tipped - they will fail to protect large numbers of people from harm, and they may also find it difficult to act. Once products are widespread, there are strong political forces ready to defend them, as well as practical problems with potential regulatory impacts on businesses and sometimes even the financial system itself.
I asked Michael for his advice about these kinds of challenges, for all the players in this ecosystem. I think you'll find his answers really interesting, including some thoughts he shares about the logic behind the design of the CFPB.
I also asked him whether we might be moving toward a fundamentally new market model, in which technology-driven transparency will require financial companies to compete mostly on winning and keeping people's trust. His answer to that is thought-provoking, too.
Michael was Assistant Secretary of the Treasury for Financial Institutions from 2009-2010. He previously served as Treasury Secretary Robert Rubin's Special Assistant, as Deputy Assistant Secretary of the Treasury for Community Development Policy, as Special Advisor to President Bill Clinton, as Special Advisor and Counselor on the Policy Planning Staff at the State Department, and as a law clerk to U.S. Supreme Court Justice David H. Souter. He received his J.D. from Yale Law School, an M. Phil in International Relations from Magdalen College, Oxford University as a Rhodes Scholar, and his B.A., summa cum laude, with Honors in History, from Yale University.
His activities today include serving on the boards of Lending Club (in Episode 5 we interviewed CEO Renaud LaPlanche) and Ripple, as well as ideas42, a behavioral economics research and development lab. He's on the FDIC Advisory Committee on Economic Inclusion and the Washington Center for Equitable Growth. He's on the advisory board of CFSI and has advised its U.S. Financial Diaries Project (see our interview with Jennifer Tescher of CFSI for more). He is also a fellow at the Filene Research Institute.
In his current role as Roy F. and Jean Humphrey Proffitt Professor of Law at the University of Michigan Law School, Michael teaches courses in domestic and international financial regulation. He's also been instrumental in forming the University of Michigan's Center on Finance, Law and Policy, which integrates finance, law, business, and computer science to work on difficult problems facing the world, including how to make the financial system fairer and safer. I highly encourage you to peruse his faculty website to find more resources.
Below you can find links to works referenced in the episode:
- Small Business Borrowers' Bill of Rights
- Michael's latest book "No Slack: The Financial Lives of Low-Income Americans"
- Hamilton Project paper on increasing access to capital for minority and women entrepreneurs
- Michael's paper on Behaviorally Informed Regulation co-authored with Sendhil Mullainathan, Harvard University and Eldar Shafir, Princeton University
- And here is the site of the FDIC's Advisory Committee on Economic Inclusion
Enjoy my conversation with Michael Barr!
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