President Obama has come out strongly in favor of overhauling the financial regulatory system by introducing another watchdog agency known as the Consumer Financial Protection Agency. This agency will be set up to monitor the marketing of mortgages, credit cards and other loan products. President Obama’s proposal is obviously a response to the dangerous and deceptive practices recently brought to light in these industries.
To be clear, we agree that there were deceptive practices in the lending industry. The mortgage industry was allowed to operate rife with fraud. Mortgage agents would misrepresent borrowers on applications to get loans for which they otherwise would not have been approved. The excesses of the credit card industry have been blatant enough to require the federal government to step in and protect consumers. We acknowledge that the industries have been allowed to ride roughshod over consumer rights without anyone stepping up for the little guy.
However, when we say that no one stepped in to protect the little guy, we are not saying that there wasn’t anyone who was supposed to be protecting the little guy. As a matter of fact, there were, and are, numerous agencies, that should have protected the consumer because that was their job. In the case of mortgages, the FBI could have rounded up mortgage brokers on charges of fraud, but they didn’t. In the case of the credit card companies (like Bank of America, Citigroup, and JP Morgan Chase), the Federal Reserve could have stepped in, but only decided to act in December of last year with a new set of regulations for credit card companies that will take effect on July 2010, and for the most part will mirror the recent changes in credit card laws. They knew that the system was broken and that it was their responsibility to fix the system. The very fact that the Federal Reserve came up with the new credit card regulations in December of 2008 means that it was in their power to do so all along. They just, plainly and simply, sat on their hands until the recent financial crisis forced them into action.
So, here’s the question that should be asked by both lawmakers and the consumer base whose opinions now drive politicians into action: what should be done concerning regulators who don’t do their jobs? President Obama’s answer is to make more regulatory offices. He wants to hire more regulators to do the job of the original regulators, while keeping on the original regulators at their posts. He assumes that these redundant regulatory bodies will streamline the system by making sure that if enough people are doing the same job somebody will get it done.
On this major point, our opinion differs from President Obama’s. We oppose the creation of the Consumer Financial Protection Agency, not just because it isn’t needed but because it is actually quite dangerous to the economy. Consumer financial protection has been a function of the existing regulatory bodies. If we separate it out and isolate it from the rest of financial regulation, then we lose the natural interdependency of consumer financial protection and the supervision that a financial institution requires in order to ensure that it is on stable footing.
It seems to us that the answer is not to create yet another agency to add to the maelstrom of regulatory voices. Instead, we would suggest that the field be pared down to one agency: one group of regulators whose job it is to balance consumer needs and financial business needs, to heed consumer complaints as they arise, and finally, to do their job. If we had such a regulatory body, actively taking care of its responsibilities, we would not be entertaining the notion of creating even more regulatory bodies to confuse the situation and to create even more opportunities for regulators to fall asleep at the wheel.
When it comes to consumer finance, what we need is fewer regulatory bodies and for President Obama to hold regulators accountable for their jobs.