The long-awaited Consumer Financial Protection Agency will come a step closer to reality Monday when Sen. Christopher Dodd (D-Connecticut) introduces his new bill of financial regulations.
There are many potential problems with the CFPA—among other things, that it will hurt consumers by driving up compliance costs and limiting choice, and that it will police small matters while not making any difference on the big ones.
But the quizzical quidnunc from the Nutmeg State has packed an even less pleasant surprise into the bill. The CFPA will apparently be part of the Federal Reserve Bank.
Here are the basics of Dodd's expected proposal. Given the toxicity of the Fed in public opinion, it's not surprising that Dodd— no stranger to the kind attentions of banks and financial services giants—blames the shift from an independent to a Fed-controlled CFPA on the necessity of compromising with Senate Republicans.
But it's hard to see how anybody could be happy with a Fed-dependent CFPA. On the left, National Community Reinvestment Coalition president John Taylor says:
The Federal Reserve is the last place an agency designed to protect consumers should be housed. It will be more waste of taxpayers' money because we'll have to pay for the appearance of protection without getting any.
As early as 1998 and 1999, we urged Chairman Greenspan and then later Chairman Bernanke to take action against lenders targeting high cost loans to blacks and Hispanics. We presented them hard, cold data backing up these practices, and they did nothing. They refused to send cases to the Justice Department. It took the Federal Reserve board fourteen years to issue rules related to unfair and deceptive lending practices. This was long after the power was granted to them in 1994, and long after we pleaded and cajoled them to do something and, more importantly, after the market collapsed.
On the right, Big Government has ongoing critical coverage of the CFPA and Dodd's erstwhile negotiating partner Sen. James Corker (R-Tennessee).
The Fed's own Consumer Advisory Council warns against the new arrangement for the CFPA.
Even if you believed in both effective regulation and central banks, there would be plenty of reason to doubt the two functions could be combined. The Fed's mixed history of consumer protection—evident most recently in circumstantial evidence that then-New York Fed president Tim Geithner may have helped disguise Lehman Brothers' dire financial condition—stems from the essential fact that the Fed is not in the business of protecting consumers. It's not really in the business of acknowledging that consumers exist at all. The Fed's job is to manipulate the money supply. The Departments of Treasury, Commerce, and Justice all seem like more logical homes for a consumer agency.
There may be some tactical reasons why a CFPA within the Fed might be more circumscribed and thus less dangerous. Unfortunately, a regulator's danger to established businesses is rarely the issue. The problem is the ability of legacy players to use regulation against potential challengers. In this respect, the Fed's allegiances clearly are not—and should not be—with consumers.