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Who Should Protect Consumers?

Remember "states' rights?"

Back when the federal government was a strong regulator of consumer products and services, including banks, airlines, brokerages, cable TV and drugs, pro-business factions screamed bloody murder. According to them, federal regulation usurped states' rights to enforce their own laws, which, they argued, would be more sensitive to the needs of local businesses and residents. At the time, state laws and regs were weaker than the feds'.

Then along came Presidents Reagan, Bush and Bush. I don't think I am being too hyperbolic by saying that they saw federal regulation as the source of all evil, including hangnails and dandruff. (While President Clinton's inclinations may have been pro-gov, he did little while in office to strengthen federal agencies.) By their lights, regulations increased costs and placed burdens on businesses and consumers alike. Throughout their administrations, they did everything they could to weaken federal regulation, and by every measure, they succeeded. If you don't believe me, just think about the SEC's regulation of Bernard Madoff.

Then along came New York attorney general Eliot Spitzer. When he asked the feds why they didn't enforce consumer protections, they responded with ideology of states' rights. He thought, he noted at a 2002 meeting of the Consumer Federation of America, okay, I represent a state, I'll enforce the law. So he sued banks for predatory lending, investment banks for inflating stock prices, and mutual funds for market-timing and late trading, among other things. But wouldn't you just know it? The minute Spitzer and other A.G.'s asserted their states' rights to protect consumers, the pro-biz long knives suddenly decided that states' rights were out. Federal law should rule. Thus, the Office of the Comptroller of the Currency, which controls national banks, pre-empted states from prosecuting banks. (In short order, the federal pre-emption claim spread to other areas of regulation, including nursing homes and drugs.) The result: a financial regulatory vacuum and a mortgage crisis to end all mortgage crises with foreclosures still soaring. (A few months ago, however, in a landmark case Cuomo v the Clearing House Association and the Office of the Comptroller of the Currency, the Supreme Court abridged the right of federal banking regulators to pre-empt state consumer protection statutes.)

Now comes the proposal to create the Consumer Financial Protection Agency, which we ordinary folks need like crazy -- if only to keep lousy financial products, like say, mortgages so packed with fees that nobody could ever have repaid them, off the market. An important provision safeguards states' rights to take independent action to protect consumers. State A.G.'s argue that right now, federal regulation is split among a number of agencies -- the Federal Reserve, the OCC, the Office of Thrift Supervision, the Commodity Futures Trading Commission -- which have historically focused on what's good for banks and brokerage houses, not what's good for ordinary peeps like you and me.

The financial services industry, of course, opposes the CFPA, not, they say, because it might inhibit them from continuing their predatory lending practices. No, what they're against is the state's rights provision, and keeping it in the bill is shaping up to be a big battle as the legislation moves through Congress. Banks assert that abiding by a plethora of state regs will boost their costs.

I don't place much faith in the higher costs argument. Businesses are always whining about higher costs. Banks want federal regulation right now because it's weak. If state laws were weak, they would be arguing for states' rights. The same goes for consumer advocates but vice-versa.

At this moment, I wouldn't be too upset if the states' rights provision is dropped. Financial reform legislation, currently under consideration in Congress, will probably unify federal regulation. The pro-federal Obama administration is likely to toughen oversight of the financial services industry. And, future electoral shifts would make state A.G.'s less interested in consumer rights.

Financial services companies may find that getting what they want may not really be what they want. Case in point: Insurance company lobbyists persuaded Texas, in 2003, to pass a tort reform law that strictly limited awards in medical malpractice cases. The law was so successful in lowering the costs of litigation, that doctors, nursing homes and other health-care providers now feel safe in carrying less coverage. Ergo, insurance sales are dropping.

If federal financial regulation turns out to be rigorous, banks and other financial institutions will again be declaring the importance of states' rights.


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