Elizabeth Warren accidentally makes the case for free market self-regulation

"I know a thing or two about toasters."

I happened to come across a Salon.com article by Paul Rosenberg about Thomas Piketty and Elizabeth Warren. Admittedly, I didn’t read much of the article at all—I only read the preview because it caught my eye. The passage I read was a quote by Warren, showing her “deft use of the humble toaster in explaining the logic of her proposal for a Financial Product Safety Commission.” She said:

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 an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the “R-word” supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves.

So apparently Elizabeth Warren thinks that the government is responsible for making sure her toaster does not burst into flames. And so does Paul Rosenberg. It’s a win for government regulation, right?

Well, there’s a problem here. Upon reading this quote, I immediately went to my kitchen and took a picture of the bottom of my toaster. This is the sticker on it.

I should sue Elizabeth Warren. She made my brain catch on fire.
I should sue Elizabeth Warren. She made my brain catch on fire.

See that “UL” abbreviation? It stands for Underwriters Laboratories. That’s not a government organization. It’s a private business. And guess what, it’s keeping you safe. Believe it or not, there are economic benefits for a company to make sure it sells you something that doesn’t burn your house down.

Maybe I’m wrong and Warren knew this and was making the case for private regulation of the financial industry.

I wish I could say that without laughing.

Now it is true that UL is a Nationally Recognized Testing Laboratory as designated by OSHA, so there is some government involvement in play. OSHA, however, was formed in 1971 while UL dates back to 1894, so UL was not a product of the government. Safety and market regulation tend to occur on their own through voluntary interactions and exchanges. It’s good for business and it’s good for helping you sleep at night.

Another popular safety organization is FM Global, which uses a “non-traditional business model whereby risk and premiums are determined by engineering analysis as opposed to historically based actuarial calculations.” So much for businesses crunching numbers to see how much a life is “worth.”

According to FM’s history on its Wikipedia page:

During the depression of 1835, Zachariah Allen, a prominent textile mill owner, attempted to reduce the insurance premium on his Rhode Island, USA, mill by making property improvements that he believed would minimize the damage in case of fire. At that time, insurance premium increases for losses were shared among all insureds, regardless of individual loss history. The concept of loss prevention and control was virtually unheard of at the time. To Allen, a proactive approach to preventing losses made good economic sense.

After making considerable improvements to his mill, Allen requested a reduction in his premium, but was denied. He called upon other local textile mill owners who shared his loss prevention philosophy to create a mutual insurance company that would only insure factories with lower risks. This approach should result in fewer losses and smaller premium payments. Whatever premium remained at the end of the year would be returned to policyholders in the form of dividends. The group agreed, and by year’s end, formed the Manufacturers Mutual Fire Insurance Company, the oldest predecessor of FM Global.

During the company’s first 14 years, the mill owners and mutual policyholders of Manufacturers Mutual enjoyed an average 50-percent reduction in premium compared with what other insurance companies were charging. The fire prevention methods they developed, monitored by regular fire inspections for mill policyholders, resulted in fewer losses. Despite its initial success, one problem remained for the pioneer mutual insurance company: a single mutual insurance company could not withstand the financial cost of the loss of an entire plant. More insurance capacity was needed, so in 1848, Allen formed another mutual insurance company, Rhode Island Mutual.

In 1850, Boston Manufacturers Mutual Fire Insurance Company, the third-oldest FM Global predecessor, was created when Allen convinced a Boston merchant with significant cotton-mill ownership to form his own mutual insurance company with like-minded Boston mill owners. Throughout the next 20 years, other mutual insurance companies were added to the group roster. Together, these companies and the ones that later evolved soon became known as the Associated Factory Mutual Fire Insurance Companies, or the Factory Mutuals, for short.

Loss information helped identify specific industry hazards and was used in developing loss control recommendations for policyholders in similar industries. Such information was shared among all the Factory Mutual (FM) insurance companies, and was utilized by the inspection teams. As the FM companies grew, however, the inspection workload became difficult to manage. By 1878, the FM companies formed a dedicated unit to handle the collective inspection activities for all the FM policyholders. This unique group of loss control specialists initially provided only inspection services. The group later began performing appraisals and adjustments, loss analysis and research activities associated with preventing fire and other hazards in order to benefit the mutual insurance company owners and their policyholders. Today, all of these services remain components to FM Global in the form of engineering and research.

The FM companies’ main interests in the late 19th century and early 20th century remained focused on researching and developing products or techniques that would help mitigate property risks and advance the efforts of property conservation. In 1874, a revolutionary form of loss control entered the loss prevention scene: the fire sprinkler. While the invention was originally designed outside the realm of FM, FM’s further development and promotion of the sprinkler head aided in its eventual widespread use and acceptance.

It’s amazing what the market can accomplish without the forceful hand of government. You can be prosperous and safe at the same time. Too bad Elizabeth Warren seems completely ignorant of this.

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Ed Goldenberg
well said, rollo. i would also like to add that when you take out a mortgage, you are not buying a good but borrowing money. if the money you borrowed turned out to be counterfeit money(one could argue the us dollar is getting to that point), then you may have a case but if you simply are incapable for whatever reason for meeting your contractual obligation and paying the money back, that isn’t the lenders fault. now of course she argues about changing rates but when you get a fixed mortgage, this doesn’t happen. if you went out and got… Read more »

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