Roger Lowenstein vs the CFPA
Roger Lowenstein has a column up on Bloomberg with the headline “Smart Banks With Dumb Customers Donâ€™t Exist” — which just goes to prove that smart writers with dumb ideas do exist. Ryan Chittum has already done a good job dismantling the piece, but I feel the add to add my own two cents with respect to his characterization of the Consumer Financial Protection Agency:
The new watchdog, wherever it goes, is the linchpin of the emerging financial-reform bill, and its premise is that greedy bankers exploiting dumb consumers essentially caused the credit crisis. Stop bankers from selling toxic mortgages and other harmful loans and we wonâ€™t have any more meltdowns.
Even though bankers were greedy, and many borrowers were naive, this is a simplistic way of viewing the financial crisis and one that misses its underlying cause. Since mortgage bankers make money from loans, itâ€™s tempting to think of them as parasites that prey on customers. But there is no such thing as a smart bank with a dumb customer; if the loan turns sour, the banker was dumb, too.
Where did Lowenstein get the idea that the premise behind the CFPA was to prevent a systemic meltdown? Has he never heard Elizabeth Warren or anybody in the Obama administration talk about it? I’ve made the case that the CFPA might have beneficial secondary effects, from a systemic perspective, but from day one its primary role and raison d’etre has been to protect financial consumers. As you might guess, from its name.
The CFPA was first proposed in its present form by Elizabeth Warren in the summer 2007 issue of Democracy. Clearly she’d been thinking about it a lot before that article appeared, and equally clearly, if you read the article, preventing meltdowns is simply not there. Partly because the meltdown hadn’t actually happened at that point. So Lowenstein is simply wrong on his “premise” statement.
As a result, when Lowenstein starts attacking the “simplistic way of viewing the financial crisis”, he’s really attacking no one at all. But then he goes on to pooh-pooh the idea that mortgage bankers are “parasites that prey on customers”, using the argument from his headline.
The problem here is that Lowenstein’s argument is based on three very shaky foundations. The first is that if a bank preys on a customer, that makes the customer dumb. But being preyed upon is not a sign of stupidity. This is an important point, because one often hears, when it comes to things like overdraft fees, that they’re all the fault of those dumb customers, and that therefore (and this is a logical step I’ve never really understood) we don’t need to worry about them. What’s undeniable is that calling ripped-off consumers dumb serves to stigmatize them, and make them less sympathetic.
Lowenstein also seems to think that the CFPA cares mostly or entirely about mortgages, when in fact its remit is far broader and more important than that. It will regulate all manner of debt products, from credit cards to payday loans — and it will also regulate non-loan products as well, like checking accounts, pre-paid debit cards, and even (maybe, this is unclear) certain retirement and savings products.
But Lowenstein’s deepest error here is to think that if you do business with a “dumb customer” then the loan will invariably go sour and you’ll end up losing money. This is clearly not true if you’re working within the originate-to-distribute business model, where you can pass the losses on to an end investor after taking your cut up front. But it’s also not true even when you hold on to the loan yourself. The millions of Americans who were eligible for a prime mortgage but ended up being sold a subprime mortgage instead were undeniably ripped off, even when they made all their payments in full. The people who get put in the credit card “sweat box” — something designed to extract the maximum amount of money from them before they inevitably go bust — are highly profitable for lenders. And people who regularly pay multiple $34 overdraft fees on a single day are always going to be a gold mine for bankers.
Lowenstein indeed seems to be opposed to the very purpose of the CFPA:
A sound economy needs healthy financial institutions. Rather than stop lenders from hurting consumers, the first priority should be to keep the banks from harming themselves. In the short run, solvency is often at odds with what consumers want (or with what they think they want).
To which I only say that if you need to gouge consumers in order to remain solvent, you shouldn’t be banking in the first place. And no one will miss you when you go away. Yes, a sound economy means healthy financial institutions. But that never has to mean unhealthy customers.