The next hot ticket in financial reform

October 8, 2010

By John Morrall, Richard Williams and Todd Zywicki
The opinions expressed are their own.

With Larry Summers leaving his post at the White House and Elizabeth Warren recently appointed as the special adviser to the new Consumer Financial Protection Bureau, the hot ticket is still to be the head of the bureau. All eyes should not just be on the appointment of the bureau’s first head, though, but on the bureau itself, for it is the centerpiece of financial regulatory reform.

More important than the innocent wagering among K streeters and Hill staffers, the horse-race to head this powerful new regulatory entity is emblematic of the incredible uncertainty surrounding new financial regulation. This makes it even more important to be clear about the effects, and not just the intentions, of this new regime.

Issuing regulations without trying to predict the consequences of those decisions is like shooting in the dark. It’s bad policy and it’s dangerous. You are not likely to hit what you are aiming for and more likely to hit something else — and the CFPB is the perfect example of this. It is a bureau that has virtually no oversight with the power to regulate every credit card, mortgage, and payday loan in America.

There is also no requirement for them to try and predict the likely results of their actions. Their result may be both higher prices and less access to credit for consumers.

Of great concern as well is that this board, like the Fed and other agencies that are affected by the new financial law, is independent, meaning they are not accountable to the President. While independence can protect agency decision-makers from improper special influence, that same independence can also insulate decision makers from proper oversight and public responsiveness.

Unaccountable bureaucracies develop tunnel vision and become incapable of balancing their priorities with social values that fall outside of their jurisdiction such as economic growth and job creation. In particular, if they do not analyze the likely results of their decisions, they may make it much harder to get loans while trying to “protect” people from taking excessive risks.

Some estimates show that there may be well over 200 new regulations that must be issued as a result of this new legislation. Unfortunately, most of these regulations are to be issued by independent agencies that are not required to analyze their actions.

The Federal Reserve, for example, is governed by a multi-member, bipartisan group of commissioners which, in theory, checks the excesses of single party oversight. But in the last six large rules that the Fed passed they did exactly zero analyses of their rules. The CFPB won’t even get this modest check of having bipartisan commissioners. Although appointed by the President with Senate confirmation, the bureau chief is completely insulated from supervision of the multi-member Federal Reserve Board or anyone else.

Besides not being accountable to the president, independent agencies are not required to produce economic analysis of their policies. This requirement has been in place from President Ford to President Obama. Because they do not have this requirement, they have a history of regulating with little or no economic analysis of their rules, even when those rules are extremely consequential.

Furthermore, they don’t have the benefit of Office of Management and Budget oversight that tends to see the larger picture of all of the possible outcomes of policy choices. Rules notwithstanding, these agencies should analyze these rules along the lines of the current Executive Order, signed by President Clinton, and should make those analyses public and transparent at both the proposed and final rule stage of their regulations.

What can be done? First, the agencies involved, primarily the Securities and Exchange Commission, the Federal Reserve and the CFTC, should voluntarily adopt standards and seek outside reviewers. Alternatively, they could voluntarily comply with the Executive Order and guidance and request OMB review.

Finally, the President could, by Executive Order, require such a step. No matter which course is taken, by analyzing their regulatory policies before they are put into place and subjecting those analyses to public comment, the agencies have a much better shot at actually solving the problems they are addressing and doing so in a cost-effective manner.

The positive effects that OIRA has on the quality of analysis and regulations are well documented. Every President since 1981 has asked a small dedicated group of highly trained analysts at the Office of Information and Regulatory Affairs (OIRA) at OMB to oversee these analyses to ensure that regulations, particularly $100 million or above regulations, are treated to a high quality and impartial analysis.

If these agencies do not perform this essential analysis, they will continue to shoot in the dark, either missing their targets by not solving any social problems, or worse, causing unintentional harm to bystanders in the markets they are trying to help.

John Morrall, an independent consultant specializing in regulatory issues, is an affiliated senior scholar at the Mercatus Center at George Mason University. Todd Zywicki, a George Mason University law professor, is a senior scholar at the Mercatus Center. Richard Williams is the managing director of the Mercatus Center’s Regulatory Studies Program and Government Accountability Project at George Mason University.

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