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Test for consumer agency to come
Law Professor David Arthur Skeel
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TEXT OF COMMENTARY
Kai Ryssdal: Former Fed Chairman Paul Volcker was on Capitol Hill today talking bank regulation. Mr. Volcker seems to have the president's ear on that topic now. He favors making what is too big to fail smaller and limiting the kinds of risks those banks can take. There's also hope that Congress will create some kind of consumer protection agency, or CFPA.
Commentator David Skeel says you can count on that.
David Skeel: If this sounds surprising, it is. The Federal Reserve doesn't like the CFPA, since the Fed would lose its authority over credit card and mortgage abuses. Neither do banks, which don't want a frisky new regulator looking over their shoulders.
But even the Fed itself now admits that it did a lousy job protecting consumers before the crisis. The stability of the banking system is the Fed's primary concern. So it never made much sense for the Fed to be consumers' regulatory champion.
The CFPA also is an antidote to the widespread anger at the billions of dollars that have been funneled to Wall Street throughout the crisis. It's a chance to finally do something for the little guys. Since the recent Massachusetts vote, there has been rampant speculation that the CFPA might be abandoned. But the Obama administration knows they can't afford to miss this opportunity, and lawmakers know it too.
The real question isn't whether there will be a CFPA. There will be. It's whether the banking industry can pull out the new agency's teeth. They persuaded the House to carve out a huge exception from the agency's authority. Hundreds of community banks will be excluded from its coverage. The key issues in the Senate are whether the senators will agree to this loophole, and what other exceptions will be built in.
The other big question is personnel. The banking industry will fight hard for a regulator who will leave them alone -- for anyone other Harvard Law Professor Elizabeth Warren. Warren was the one who dreamed up the new consumer agency, and she has been a thorn in banks' side for years.
So the real test will be who Warren is working for at the end of the year. If she's working for the CFPA, we'll know that Congress finally put the interests of consumers ahead of banks' profits. If she's still working at Harvard, we'll know that the profits, and the gravy train that runs between Washington and Wall Street, still come first.
RYSSDAL: David Skeel is a professor of Corporate Law at the University of Pennsylvania.
I will come to David Skeel's defense, though I do not share his optimism. First, it is true that banks pass on the expense of regulation to their customers, but that is true of all industries. Drug companies have to contend with the FDA testing protocols, food producers contend with the USDA, and investment banks contend with the SEC. But, if not for these regulatory agencies, we would be taking drugs that kill us, feed poison to our kids, and get dirty facts about the securities on Wall Street hidden from us. Oh, wait, I guess that happens anyway.
Which is the point that I think I disagree with Professor Skeel: a CFPA is not a panacea for consumer financial fraud. Agencies are easily taken over by industry insiders when the administration in office doesn't like them (see Junior Bush presidency). You must, in the end, give consumers some power to strike a balance, a right to sue for wrongs, and not get poured out of courts by meaningless legislation (see HIPAA).
And as far as the exception for credit unions and community banks goes, do we really just pretend that bad things can't happen there? While the small community banks' and credit unions' track record is stellar compared with Wall Street, do we really want to just assume that abuses will not, or cannot happen there?
As a manager of a local credit union, I bristled a bit at Mr. Skeel's treatment of the House's exemption of small community banks. Rather than being a huge, tooth- extracting "loophole", this exemption (which also would include most credit unions) is absolutely logical and in the best interest of consumers and taxpayers alike. Credit unions played no part in the financial meltdown. Credit unions are conservatively managed, and because they assume 100% of the risk they are careful to make only prudent loans. Credit unions did not make any subprime mortgage loans, and most didn't even make adjustable rate mortgages. In fact, the Chairman of the House Financial Services Committee has said “If credit unions made all the mortgage loans, then there would have been no sub prime crisis and therefore no economic crisis.†Credit unions also didn't invest in speculative mortgage backed securities. They invest primarily in manually underwritten loans back to their members who actually own the credit union. Deposits in excess of those loans are invested in guaranteed CD's.
Given that, what sense would it make to create an overly large new bureaucracy to unnecessarily police thousands of financial instutions. Nothing could be gained, but would only serve to increase the cost of government. The truly innocent need no parole officers.
This is one of the most bias comentaries I have heard on NPR. I guess is a bank makes a profit that is a bad thing!There is no free regulation. Any regulation has cost to the bank which will have to be past on to the coustemer or the banks will reduce acces to credit to insure only the best qualified have access. The banks have shareholders that expect a reasonable return on there investment or the will choose other types of investments. Mr Skeel talks of a "gravey train" between banks and Washington as if this is agiven fact and all banking institutions or evil.
