Worst. Regulatory. Proposal. Ever.

by Noam Scheiber | September 21, 2009

It sounds like various Blue Dogs on the House Financial Services Committee aren't keen on the proposed consumers financial products agency. Their preferred alternative? A "council" of regulators to oversee consumer financial protection. Politico's Victoria McGrane has the details:

Blue Dogs and other conservative Democrats — uneasy with a key element of President Barack Obama’s plan to regulate Wall Street — are rallying around an alternative proposal that scraps the consumer financial protection agency the president has been pushing.

Rep. Walt Minnick, a freshman Democrat from Idaho, has floated the new plan. Instead of creating a new federal agency to protect consumers from predatory financial firms and shoddy products, Minnick’s plan would have existing state and federal regulators work together in a “consumer financial protection council.”

Now this is just ridiculous. For one thing, as the administration has pointed out, the way to ensure that a certain type of regulation isn't enforced is to give multiple regulators a say in it. In fact, the greater the number of agencies who need to agree before taking action, the less likely it is that action will be taken. So how many agencies does Minnick envision sitting on this council? 

The council would include the heads of federal bank and financial regulators, including the Federal Reserve, the Federal Deposit Insurance Corp, the Securities and Exchange Commission and the National Credit Union Administration; the Federal Trade Commission; the Department of Housing and Urban Development; and liaisons from several related state advisory boards.

Right. So the point is to make it completely toothless.

Second, this is just oxymoronic:

“We’re trying to come up with something that will achieve the objectives of what the White House is asking us to do without creating a new stand-alone federal regulator,” Minnick told POLITICO. ...

CFPA critics also question the wisdom of separating consumer protection from safety and soundness enforcement, another major objection from the financial industry.

Consumer protection rules have safety and soundness implications, and vice versa, Minnick said. If the two missions are separated, “it’s going to be hard for that regulator to maintain a balanced perspective and harder yet for the two agencies to reconcile potential conflicts of regulation,” he said.

Problem is, we already have an agency charged with regulating consumer financial products. It's called the Federal Reserve. And the reason it's so lousy at its job is that, in addition to regulating consumer products, it's also in charge of regulating bank safety and soundness. (See this Larry Summers explanation of why the two mandates, far from complementing each other, are basically incompatible.) Which is to say, Minnick is proposing the very status quo that led to our recent disaster--except, of course, that he wants to weaken it by imposing a council-type structure.

Look, I understand that the community banks--which Politico says are behind the Blue Dog effort--are anxious about a new consumer financial product regulator. Though the regulator would in principle give them an advantage over large commercial banks, for whom fleecing consumers is a more central part of the business model, in practice you can imagine the big banks "capturing" the new regulator by virtue of their greater political strength. So the concern is that the consumer financial agency would end up giving the big boys a pass while throwing the book at the smaller players. 

But if that's the concern, then the solution isn't to eviscerate the proposal. The solution is to create two separate consumer financial product agencies: One for the big banks and one for smaller ones. But, please, spare us this hot air about a council. It's pure nonsense.

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