As Chair of the Congressional Oversight Panel, which has been charged with reviewing the current state of financial markets and the regulatory system, Harvard professor Elizabeth Warren has been quite vocal in her support of the administration’s proposal for a Consumer Financial Protection Agency (CFPA). The CFPA would be the regulatory body that ensures that financial institutions provide clear and simple disclosures, which would ostensibly deter consumers from opting for risky and “exotic” financial products, and would be the eighth agency involved in consumer credit regulation. While I agree that there has been little effectiveness in the regulatory system as far as consumer financial protection is concerned, this is no reason to create yet another agency. The CFPA, which was actually conceived by professor Warren several years ago, would separate the regulation that provides consumer financial protection from the regulation that ensures the banks that serve these consumers are solvent, and do not introduce toxic products to the market. If our hope is for a solid financial system, then it must be understood that these two areas of regulation go hand-in-hand. Warren is right, “the credit market is broken,” but she herself proves that the CFPA won’t fix it.
Warren lays out her arguments for the CFPA in two articles that appeared recently in Business Week and in The Baseline Scenario. While she is spot on in her analysis of the nature of the problems that plague our financial system, her solutions do not address the problems that she identifies. It’s true, traditional financial products cannot compete with “exotic” products whose terms seem attractive up front, but hide surprises and changes that are revealed only after the consumer has committed. Further, the more complex these “exotic” financial products become, the less able consumers are to make comparisons. Right now our financial system lacks a level-playing field, transparent in its operation, which encourages competition, and also engenders product innovation.