Caveat emptor and vice versa

I pointed out a new Bloomberg poll today that contains mostly expected results. Americans have unfavorable views of Wall Street, Congress, insurance companies and business executives. But a little surprising were the answers on consumer protection:

Almost seven out of 10 people surveyed support using current bank regulators for consumer protection, backing positions held by the financial industry and Republicans over President Barack Obama's proposal to establish an independent agency...

Obama's proposal for a stand-alone consumer agency has been a main sticking point in negotiations between Senate Democrats and Republicans on broader legislation to increase oversight of Wall Street.

"By creating a new consumer agency, we will finally set and enforce clear rules of the road across the financial marketplace," Obama said in a March 22 statement. "I will continue to fight to strengthen the bill and against attempts to undermine the independence of this agency."

But the current proposal has the consumer protection agency housed at the Fed. Bloomberg also had this quote:

"People are generally satisfied with the way consumer protection has worked with banks," said Mr Ernie Patrikis, a lawyer who specialises in banking supervision. "Most Americans could care less about redoing the financial regulatory structure."

I seriously doubt the spirit of that last comment, but he may have a point. What people want isn't necessarily an independent this or a supervising that. They want some semblance of fairness, and they want to see repercussions for people who take advantage of others and for those who behave recklessly with their own money or with money that eventually comes out of the taxpayer's pocket. They want to know what the rules are and that they will be enforced.

Scratch Pad reader Sam in Texas asks important questions: 1) how does a Consumer Protection Agency stay independent, and 2) would the proposed Consumer Protection Agency have been able to prevent the booking of bad mortgages that led to our current financial crisis?

Even under the Fed, the consumer protection agency would have an independent budget, a somewhat independent process for choosing leadership and a somewhat autonomous rule-making authority. How that all would work in reality inside the Fed's walls is up for debate. But independent agencies have failed in the past, too.

Who knows whether such an agency could've prevented the subprime crisis? Maybe that's part of the hesitation we're seeing in this poll.

I harken back to a 1933 FDR speech in which he proposed disclosure requirements on stock sales:

This proposal adds to the ancient rule of caveat emptor, the further doctrine "let the seller also beware." It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.

The purpose of the legislation I suggest is to protect the public with the least possible interference with honest business.

What's interesting is that FDR proposed the regulation without a regulator in mind. The SEC eventually took up the mantle, but FDR started with the regulation, not the regulator and its independent qualities. It was the principle that was important.

Perhaps that's what Americans are trying to say now.

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