When I first learned to drive as a teenager, my mother let me take the wheel on trips to the local grocery store. She was there in the passenger seat, arms flailing every time a squirrel or a piece of sagebrush came across the road, her left forearm pressing my chest back against the seat. It was instinct. She wanted to brace me for the impact of a crash. The only problem was that I needed both arms free to keep the van from crashing in the first place. While I appreciated my mother's concern, I hated the thought that she might protect me to death.
Which is the same attitude every American should have when it comes to the new consumer financial protection laws President Barack Obama and Rep. Barney Frank (D-Mass.) want to impose on businesses.
Later this afternoon, President Obama is scheduled to give a White House speech reiterating his support for the creation of a Consumer Financial Protection Agency (CFPA). Obama first proposed the idea in June as a part of his grand plan to overhaul Wall Street regulations. But it has come under considerable attack recently for fear it would smother businesses and end up hurting consumers.
If created, the CFPA would be tasked with ensuring that consumers who use financial products like bank accounts, mortgages, and credit cards are protected from the evil corporations that are out to get their money. In a sense, it is a noble idea, stemming from the mind of a noble woman, Congressional Oversight Panel Chair Elizabeth Warren. But it's going to protect us to death.
In its current form, the CFPA will pile on burdensome new rules, restrict innovation, hurt small businesses, increase the cost of doing business, spawn a massive bureaucracy, and create severe conflicts between state and federal law. Frank's proposed version would even allow the new agency to write and enforce laws beyond the scope of existing legislative authority. There are good ways of reforming consumer protection. The Consumer Financial Protection Agency is not one of them.
Currently, consumers are protected by a layering of federal agencies, depending on the type of financial institution and its corresponding regulator. Much of the consumer protection at banks lies in the Federal Reserve, but the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, along with other agencies in the alphabet soup of regulators, have mandates to watch out for consumers as well. By and large, this protection is supposed to prevent abuse, stop "predatory lending," ensure that banks give out the appropriate information, and stop companies from tricking consumers into buying something they don't want. In theory, that is all good stuff.
The free market needs a regulatory structure, there need to be rules to guide conduct, fraud and theft must be prevented. There's nothing inherently wrong with the government protecting consumers from actual destructive behavior. The problem is that the CFPA would try to protect consumers from themselves, at the expense of business.
Congress has already given in to this paternalistic urge by passing the credit card act in May 2009. That law tried to keep banks from charging high interest rates and fees, but instead has only served to restrict available credit, especially for low-income borrowers. The CFPA is looking to expand that disastrous initiative.
Congress approaches the issue as one of "systemic risk." From the point of view of the Democrats in the House Financial Services Committee (FSC)—the legislative body creating the CFPA—consumers need a single, all-knowing agency to protect them, one that has the power to scan the whole market and assess the dangers of different products. The Democrats argue that had a CFPA been in place, the dangers of subprime mortgages would have been spotted and regulators could have stopped the mortgages' hazardous growth.
In a way, it's a logical argument—but it only works if government agencies could be all-knowing.
The problem is that many people did see the danger in subprime mortgages, particularly their fragmentation into mortgage-backed securities, but it wasn't possible to know everything we know now in the heat of the moment back then. (Which is a reason no one acted.) Regulators are fallible, and there's nothing prudent about trusting a single, bureaucratic agency with managing the safety of the whole market.
Nevertheless, some positive strides have been made recently. Under pressure from the U.S. Chamber of Commerce (USCC)—vehemently opposed to the idea of a CFPA—and Blue Dog Democrats, House FSC Chairman Frank has backed down from some of the more extreme aspects of the original Obama/Warren design.
The Obama/Warren plan would have required financial institutions to offer certain products, including "plain vanilla" versions of checking accounts, mortgages, or IRAs. The Obama/Warren CFPA would also have received the power to create simplified products and force firms to sell those in addition to—or in place of—their own financial products. Those deadly provisions are now out.
The original plan also called for forcing all financial institutions to make their products easier to understand. This is a component of the credit card bill, which limits fine print to allow consumers to understand their purchases in four minutes or less. While Frank is still pushing for increased disclosure, he has taken out the vague and dangerous "Reasonableness" clause, which left it up to the CFPA to determine what was the "reasonable way" to understand a given financial product.
Frank also issued a memo listing the types of institutions that won't be subjected to CFPA regulation, including lawyers, auto dealers, telecom companies, 401(K) providers, and real estate brokers. However, the financial products these companies offer will be subjected to regulatory oversight by the CFPA, a rather significant sleight of hand.