Elizabeth Warren’s plan to prevent another financial meltdown: crowdsourcing

Amanda Carey Contributor
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Elizabeth Warren, America’s working-class warrior who Time Magazine-dubbed “The Sheriff of Wall Street,” has revealed her strategy for preventing another catastrophic financial meltdown — the former Harvard Law professor is going to put out an open call to working class America for tips.

When the financial collapse hit in 2008, America’s best financial minds went to work trying to explain the cause of the meltdown which later turned into a recession. Banks became the number-one target, as everyone from politicians to professors lambasted practices like predatory lending, providing low interest rates, and dolling out subprime mortgages.

Enter Warren, with her novel solution of how to prevent another financial disaster.

After months of speculation over what role President Obama would be brave enough to give Warren, the polarizing architect of the new Bureau of Consumer Financial Protection (BCFP), she was finally appointed assistant to the president and special advisor to the Secretary of the Treasury in September. Not quite the title some said she deserved, it still amounted to a de facto position as head of the BCFP.

After breaking her near moratorium on media interviews, Warren talked exclusively with the National Journal, where she explained her plan to use “crowd-sourcing” technology as a platform for collecting complaints and getting suggestions from consumers about how to best protect them against banks.

“It’s also about how we will receive information about how the world works,” Warren said in the interview. “It’s about how people will tell us about what is happening. I want you to think about this more like ‘heat maps’ for targeted zip codes where problems are emerging, or among certain demographic groups, or among certain issuers.”

The relatively new idea — the concept of “crowdsourcing” first appeared in a 2006 piece in Wired magazine — involves gathering information from masses of people, rather than specialized individuals. Think Wikipedia, for example. The power to harness information from crowds exceeds the power and capability of a few smart minds — or so the theory goes.

Warren has high hopes for the unorthodox approach which, until now, was largely left to the business and tech worlds. Her hopes are so high, in fact, that Warren believes crowdsourcing will change the way the economy works.

“The power of enforcement will be partly about the agency. But it will be partly, in the future, be about how people crowdsource around identified problems,” Warren said. “The idea that people can talk to each other, whether it’s through the agency or from other platforms.”

She continued: “In a sense, the whole notion of how markets work will change.”
Not everyone agrees.

Peter Wallison, senior fellow in financial studies at the American Enterprise Institute, thinks crowdsourcing will actually create more problems than it fixes.

“There is a tradeoff between the number of people assigned to investigation and the number of people assigned to receiving complaints,” Wallison told The Daily Caller. “If most of your personnel have to be assigned to receiving and assessing complaints, because these are pouring in, then you have fewer to investigate the legitimate ones.”

In other words, crowdsourcing is more likely to make the BCFP’s operations less efficient, according to Wallison. Not only that, Wallison thinks Warren’s hope of achieving collective consensus on how to arm consumers with the necessary knowledge needed to wage battle against Wall Street bankers could prove to be overly optimistic.

As Wallison notes, Warren’s technique would only make it easier for consumers to deluge the BCFP with complaints that “could drown an agency in individual disputes, reducing its effectiveness in addressing the serious ones.”

Warren is currently charged with hiring roughly 1,000 new workers to staff the BCFP before it becomes fully operational in July 2011.