Why Banks Should Back Elizabeth Warren to Head the Consumer Financial Protection Bureau

Last Updated Jul 29, 2010 11:03 PM EDT

Among the many reasons why President Obama should name Elizabeth Warren to head the government's new Consumer Financial Protection Bureau are her toughness, independence and expertise. But the best reason is also the one that gets the least attention: Warren -- scourge of Wall Street, tormentor of bank CEOs and shifty U.S. Treasury officials -- can help restore faith in our financial system.

That's something our economy sorely needs, as we stare down the barrel of a double-dip recession. It's easy to forget, but good financial regulations (and regulators) give investors and businesses confidence, increasing the flow of capital to places it needs to go. Good rules foster competition. They promote certainty, clarify risk, and preserve the safety and soundness of financial institutions.

If Obama is right, the new financial reform law also should reduce the probability of massive financial industry bailouts, which perhaps more than anything have cemented in people's minds the conviction that the game is rigged. And as recent history makes all too clear, bad regulations and regulators -- Glass Steagall, the Commodity Futures Modernization Act, Alan Greenspan -- do the opposite.

Of course, appointing Warren wouldn't abolish deceptive financial practices, or even pay immediate dividends for consumers. Whomever leads the protection bureau will face the daunting task of building it from the ground up. Like any new government body, it will have to find its place at the regulatory table, with all of the turf battles that process implies. This will take time.

For Obama, the opportunity in tapping Warren is less to transform the market for financial services than to make a symbolic statement. The message: It's time to restore a sense of balance between government and the market.

Writes Neil Irwin of The Washigton Post:
[T]he new consumer financial protection regulator will need to balance the protection of consumers from unscrupulous, exploitative, or dangerous loans and other financial products with the benefits that come from financial innovation.
For too long, the benefits of innovation have obscured the need to safeguard consumers. That's where Warren's personal traits might, in fact, prove invaluable. The new bureau comes equipped with some important tools -- not new powers so much as a consolidation of existing authority that formerly belonged to other banking agencies. Yet someone must be willing to use that power. And while it's hard to judge other lesser known candidates for the job, who include Treasury official Michael Barr and consumer advocate Eugene Kimmelman, there's little question about the force of Warren's will.

Restoring faith in the financial system requires restoring faith in its guardians. Let's hope Obama takes his chance.

Image from Wikimedia Commons, CC 2.0
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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