The death of the CFPA

By Felix Salmon
February 28, 2010
Edmund Andrews, freed from the strictures of writing for the NYT, is proving to be a valuable addition to the econoblogosphere: today he not only writes smartly about Chris Dodd's CFPA compromise, but also posts the actual document. That's more than the NYT, WSJ, or Bloomberg managed to do. It's well worth reading, despite -- or even because of -- the fact that this olive branch has been roundly rejected by both Dick Shelby and Bob Corker, and has therefore not even managed to survive the weekend.

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Edmund Andrews, freed from the strictures of writing for the NYT, is proving to be a valuable addition to the econoblogosphere: today he not only writes smartly about Chris Dodd’s CFPA compromise, but also posts the actual document. That’s more than the NYT, WSJ, or Bloomberg managed to do. It’s well worth reading, despite — or even because of — the fact that this olive branch has been roundly rejected by both Dick Shelby and Bob Corker, and has therefore not even managed to survive the weekend.

The Bureau of Financial Protection proposed by Dodd was pretty toothless: its rules could be vetoed by the Systemic Risk Council, it would essentially be barred from enforcing its own rules on small institutions, let alone examining those institutions, and it would have to talk to bank regulators before enforcing any rules on bigger banks.

Worst of all, Dodd’s compromise would “adopt the House-based preemption standard”, which is code for saying that individual states would be barred from stepping in to regulate consumer rip-offs if and when the BFP was asleep at the wheel.

And yet even this weak excuse for a CFPA has proved too much for the Republicans. Economics of Contempt makes a seemingly-sensible argument that we shouldn’t let the perfect be the enemy of the good, and that Dodd “should push for whatever he can get in terms of a new division dedicated to consumer protection inside Treasury”. But if even this compromise doesn’t meet that bar, one begins to wonder if anything would be acceptable to Shelby and/or Corker.

At this point, I’m beginning to think that Dodd should accept whatever Corker would find acceptable — probably just a charge for existing regulators that they keep an eye on consumer protection as well. Then Elizabeth Warren should team up with the Center for Responsible Lending to create a Consumer Financial Protection Agency entirely unafilliated with the government, which would give out “consumer friendly” badges for financial institutions which meet its standards, and which would have a high-profile bully pulpit from which to name and shame those institutions which rip off their customers. It might not have any teeth, but in that respect it wouldn’t differ markedly from whatever we’re going to end up with from Dodd and Corker.

2 comments

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It took the depression of the 1890s, about four years in duration, to bring about populism which eventually led to progressive reform. Even then it took additional (banking) shocks to see consumer protection acts such as the Federal Trade Commission, which was established in 1914. Unfortunately reform takes numerous shocks of sufficient severity.

Posted by david3 | Report as abusive

Caveat emptor. Further, an honest man can’t be cheated (he also can’t be found).

These calls for additional regulation will fail to achieve their purported goals because the regulators will be captured by those they are purported to regulate. They will also fail because they will engender a false sense of security, leaving people more open to frauds and scams and socializing the costs. Bailouts are a bad idea whether they are for too big to fail institutions or too sympathetic to fail individuals.

The best regulation is less regulation. People will always be greedy and foolish about their investments. Regulatory structures just increase the costs to investors and taxpayers and create more feather bedded jobs for people who can’t perform in the private sector.

Posted by GraemeHein | Report as abusive