James Pethokoukis

Alex Pollock does, and the results are not pretty:

Consider a new, independent regulatory bureaucracy filled with ambitious officers and staffers who are interventionist by ideology, believers that people need to be guided for their own good according to the tenets of “behavioral economics,” social democratic by faith, and closely aligned to numerous “consumer advocates.” They will hardly be content with the project of “improving disclosure,” important as that is.

They will ineluctably embark instead on allocating credit in terms of “improved access” and “fairness.” In other words, they will promote expanding riskier loans, in spite of the fact that making people loans they can’t afford is the opposite of protecting them.

This is why, if such an organization is to be created, it is absolutely essential that it be truly part of, and subordinate to, a regulatory body also charged with financial prudence, safety and soundness, and balancing risks. Better would be not to create it at all, but rather to centralize the responsibility for clear, straightforward key information in a relevant existing regulator—the Federal Trade Commission, for example.

Some talking points/analysis on the  Chris Dodd retirement

1. Makes it more likely Ds keep CT Senate seat, but also a sign of voter discontent with incumbents. Welcome to the U.S. Senate Richard Blumenthal, who says he will run.

2. Makes it more likely that financial reform will be bipartisan, Dodd wants this to be a legacy moment for him. But the GOP may stall.

3. I predicted Dodd would retire when he announced his support for Bernanke. (Yes!) Opposing him would have been the smarter political move.

4. His Banking committee replacement in 2011 is likely Tim Johnson, considered friendly to the financial services industry. Hard to see a Glass Steagall repeal getting through a committee run by him.  Byron Dorgan, by the way, was a G-S guy and he is leaving, too. Sweeping financial reform happens now or never.

It was a revealing performance that Treasury Secretary Timothy Geithner gave on Wednesday before the House Financial Services Committee. and an important one. While Geithner frequently journeys to Capitol Hill, his latest appearance comes as the administration begins a new renews a push for passage of sweeping financial regulatory reform.

Maybe “push” is the wrong word. “Scramble” might be better since Geithner stressed that time is of the essence. “We can’t let momentum for reform fade as memory of the crisis recedes,” he said. Indeed, Tthe same dynamic is at play with financial reform as it is with healthcare reform: Get a reasonable bill passed this year or, ideally, before the November gubernatorial elections in New Jersey or Virginia, where Republicans are leading.

While Geithner said the uber-practical administration favors what will work, the reality might be closer to what will pass. Take the White House proposals for various consumer reforms, including the establishment of a Consumer Financial Protection Agency. Chairman Barney Frank wants to tweak the White House proposal, eliminating a provision that would force financial companies to offer “plain vanilla” versions of financial products. Frank would also exempt a range of businesses from CFPA oversight such as accountants and lawyers.

Geithner’s response: “There’s nothing in there, at first glance, that troubles me significantly in terms of its practical value.” This is good news. Rather than having a new agency attempt to determine what plain-vanilla mortgages and credit cards are and then mandate them, better to merely improve disclosure of fees and requirements for consumers.

Here is hoping that Geithner and President Barack Obama show a similar flexibility on the issue of a super-regulator and systemic risk. The White House continues to push for an expanded Federal Reserve regulatory role despite the potential risks to its independence. The idea of a SuperFed is also likely to meet stiff congressional opposition given the Fed’s role in creating the financial bubble through errors in monetary policy and lapses in regulatory judgment. Creation of a SuperFed might also have to accompany passage of a bill to audit the central bank, another threat to its independence.

Christopher Dodd, Frank’s opposite in the U.S. Senate, favors a single regulator to oversee banks. Ideally, the Fed would then be free to focus on its core mission of conducting monetary policy, while, as an American Enterprise Institute analysis put it, a separate super-regulator could enjoy supervisory economies of scale and achieve consistency. This easily passes the Geithner “what will work” standard.

I am attending a Senate Banking hearing on the Obama proposal to create a Consumer Financial Protection Agency. Some folks think new regulations would stifle financial innovation. Sen. Chuck Schumer just dismised “innovation as merely “clever ways to dupe the consumers.”

I just debated the CFPA on CNBC with Conn. Attorney General Richard Blumenthal (who also said he was not going to challenge incumbent  Chris Dodd for US Senate in that state). A few things about the CFPA:

1) The financial crisis was not caused by duped mortgage borrowers, so this is an answer to the wrong question.

2) This bill is not just about clearer disclosure for credit card and mortgage debt. If a person gets a mortgage or credit card that he can prove was not suitable for him — or didn’t get something he should have — then it won’t matter how exhaustive or clear the disclosure of risk. There will be loads of litigation here, driving up credit costs. And determining suitability will also drive up costs.

3)  You will see a two-tiered financial system with most people having access to vanilla products only. The wealthy or supereducated will get access to financial boutiques and more personalized products. It is the hedge fund-ization of consumer finance.

Two good articles on this topic, one from my pal Stephen Spruiell; the other from Peter Wallison.