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The Case Against the Consumer Financial Protection Bureau

Yesterday marked the launch of the Consumer Financial Protection Bureau the rightness of whose stated mission -- to help "consumer financial markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives" -- is unassailable.

Yet conservatives and business interests are assailing it in every way they can. Chief among them is the Wall Street Journal's editorial page which in the last few days has featured complaints about the agency and the nomination of Richard Cordray, former Ohio attorney general, for its director, as well as an op-ed by Senator Richard Shelby of Alabama, ranking Republican on the Committee on Banking and Urban Affairs. Worse, the House yesterday passed the speciously named Consumer Financial Protection Safety and Soundness Act of 2011 which punches the guts out of the new agency. Among other things, it prevents the CFPB from doing business until it has a director, and already, Republicans have announced that they will filibuster the appointment of any nominee unless the White House agrees to blunt the bureau's powers. "Mr. Cordray's nomination is dead on arrival in the Senate and will remain so until these reasonable changes are made," wrote Shelby in his WSJ piece.
So what are these folks kvetching about, and do their complaints hold water? Here's my take:

  • Funding is not subject to Congressional oversight. Financial reform legislation last year requires the Federal Reserve to set aside 12 percent of its budget for the CFPB. Shelby carps that Congress should be in charge of appropriations "to ensure that it [the CFPB] doesn't engage in wasteful or unnecessary spending." To this, I say, please stop making me laugh so hard, Mr. Shelby. My tummy hurts. In all seriousness, when has Congressional oversight ever kept a government agency from spending money unwisely? I would argue that oversight often translates to stupid spending, by requiring, for example, that a bureau or agency open an office or place a facility in East Dew Drop, Mississippi or Pothole, Pennsylvania, merely to please a powerful legislator. Anyway, lots of regulators are financed by fees, rather than by Congress.
  • The CFPB will threaten the health of banks which provide financing for businesses that create jobs. I don't see how making financial products easier for consumers to understand contributes to banks' insolvency. In fact, the agency will probably make banks and other financial institutions stronger by ensuring that they don't make loans that people can't possibly repay -- something that banks did on their own. Moreover, even without the CFPB, banks haven't been offering loans to businesses which in turn haven't been creating jobs. It's hard to see how the CFPB could stop something that isn't happening anyway. The Financial Stability Oversight Council, moreover, which is headed by the Treasury Secretary, has the power to overturn CFPB rules that could topple the banking system. I am not worried.
  • The CFPB has an all-powerful director with a five-year term that overlaps a change in administration. Shelby insists that the agency should be run by a five-member panel composed of Democrats and Republicans which would have to agree on any new disclosures or rules. Talk about stalemate! By the time they approve watered down proposals, thousands of consumers will have been fleeced. And, what's wrong with a director whose term outlasts the current President? Nobody objects to having the head of the Federal Reserve hold office for several years at a time.
  • The agency would be "unduly banning profitable products." This objection from Shelby also. Just because a product is profitable, however, doesn't mean it should be on the market. As I argued in an earlier post, some financial offerings are simply toxic and exist only to rip people off.
  • The consumer bureau's rules and regulations should be subject to the approval of all other banking regulators. But, folks, those are the same pro-industry entities that in the past covered their ears, eyes and mouths when presented with myriad reports and complaints about predatory subprime loans -- and even sued to prevent state authorities from clamping down on abusive lending practices. Should the Office of the Comptroller of the Currency and the Office of Thrift Supervision and so on have to approve of the CFPB's every move, years would pass before any rule went into effect.
  • Obama's appointee is objectionable. The assailers said they would never approve Harvard Law professor Elizabeth Warren to head the consumer bureau, even though it was her idea in the first place. Now, however, the Journal has a raft of complaints against the President's substitute nominee Richard Cordray whose career, it said, "sounds like Mrs. Warren without the charm." What's he done that is SO terrible? Well, as Ohio AG, he sued GMAC Mortgage over its fraudulent foreclosure practices, rating agencies for saying that mortgage-backed securities were safe when they weren't, and Bank of America for hiding losses and bonuses when it acquired Merrill Lynch. Call me crazy, but I think he was just doing his job. Oh, the Journal also complains that he might run for Ohio governor in 2014. If political ambition excludes someone from heading a federal agency, then by the same token, a fierce consumer advocate like Ralph Nader would also be unacceptable, since he's run for President too many times to count.
It's almost unbelievable that the powers-that-be would fight so hard to undermine an agency whose sole purpose is to ensure that consumers are treated fairly. A similar bureau, the Financial Services Authority, has been in existence in the United Kingdom for the past ten years, and I haven't heard that the sky has fallen there. I fear that unless American consumers raise a big fuss with their elected representatives, the Consumer Financial Protection Bureau will become another boondoggle that simply doesn't work.

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