I am sure you are familiar with the concept of “lemon laws” as it applies to car dealers and manufacturers, and you may even have had a personal experience in purchasing a defective vehicle.

The world ‘lemon’ applies to (as defined by Wikipedia) “anything that was defective or broken or which breaks constantly, particularly a car.”

Hmmm, anything broken…or which breaks constantly. Sure sounds like the banking system and its credit products (cards, loans, mortgages, etc.) to me. The parallels are stark: If this industry ain’t “broke” and rife with used car salesman types, which is?

Bankers have more legal wiggle-room than used car dealers, likely thanks to their selective purchase of Legislators.

Unlike the dealer or manufacturer, there is no warranty provided on the product.  Ergo, they get a (presumably) free pass on any responsibility for delivering flawed goods.  Nope, we don’t even qualify for a 36,000 miles guarantee.

Let’s consider what happens in the auto world.  When no Manufacturer’s Warranty exists or if state laws are of no help, federal laws step in. Wikipedia provides a list of some of the problems/issues which may be present and actionable:

• Prior history of mechanical problems known to the seller: Laundered Lemon.
• Previously salvaged or wrecked.
• Stolen, stripped and rebuilt.

Detect any parallels?

During their too-rare moments when the Senate drag Wall Street Bankers before them to try to determine exactly what these people are selling, and to whom, there wasn’t a soul who could describe in simple terms their “products.” (Do any of us still understand a credit-default “swap?”)  They are barely willing to lift the hood.  They manufactured out of whole cloth the products that they, alone, knew the value – or lack – of, and which they sold to the unsuspecting victims who wandered into their lots.

Believe it or not, enlightenment does exist – in the car trade.  Just why the “lemon law” was needed was described in a 1970 paper by the economist George Akerlof. In this academic study, he discusses ‘information asymmetry’ –  when the seller knows more about a product than a buyer.

This research, in which he used the market for used cars as an example problem of ‘quality uncertainty,’ earned him and his partner a Nobel Memorial Prize in Economic Sciences in 2001.  The paper concludes rightly that owners of good cars will not place their cars on the used car market.  All of you economists reading this blog will understand this to be – the bad (money) driving out the good.

Maybe this explains why people are putting their money into gold, rather than into banks?

Where is our protection? Where in the Yellow Pages can we find “lemon law” attorneys who have practices not limited to automobiles? Why not create laws similar to those in California in which not only are automobiles and that industry are covered – but anything mechanical.  Better yet, allowed by both state and federal law, the offending party must pay legal fees if they lose the case.

Can you imagine any bank winning a case brought by consumers, given a similar playing field?

As ever, the problem lies in convincing your elected (and therefore beholden to you?) politician to enact such laws. Just how likely will it be to get the same people who bailed out BOTH the banking and auto industries to impose a much-needed financial lemon law?

Libertarians, who seem to oppose anything regulatory, suggest that the lemon problem creates entrepreneurial opportunities, i.e., lemon insurance, lemon after-market, etc.

I don’t want more ‘entrepreneurial opportunities’ to right wrongs.  I want justice.

There isn’t a person out there (other than the banker) who isn’t sick of the fact that only lemons are available to the banking customer, and that “cherries” seem to be in short supply.