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AP Photo/J.Scott Applewhite
The Senate Banking, Housing, and Urban Affairs Committee met on July 22, 2009 to consider the creation of a consumer financial protection agency. Treasury Secretary Timothy F. Geithner describes the proposed agency’s mission as a protector of consumers and a promoter of access to financial products. According to Mr. Geithner, the agency will meet its mission by ensuring financial service companies provide consumers with clear and concise information regarding services; protecting consumers from unfair or deceptive practices; and promoting consumer access to fair, efficient, and innovative financial services markets.
In addition to ensuring consumer access to markets, the new agency will try to keep consumers in the market for financial services by monitoring market risks. Financial services providers will be subject to examinations by the agency designed to ensure compliance with new and existing consumer protection statutes and regulations.
House and Senate Democrats appear ready to support President Obama’s desire to establish this uber-agency. Barney Frank, (D., Mass.), chairman of the House Committee on Financial Services, appears ready to put more taxpayer money where his mouth is having introduced on July 8, 2009 HR 3126, the Consumer Financial Protection Agency Act of 2009. While House Democrats are reportedly rearing to get a bill to Mr. Obama by the fall, the more deliberative Senate is contemplating a longer time frame. Two questions come to mind. Do we need another consumer protection agency? Will the new agency work?
The melt down in the financial markets specifically and the overall downturn in the economy have created the platform for launching additional consumer protections or so the argument goes. The argument is a weak one. Consumer protection legislation tends to have protection of the consumer against fraud and deceptive practices as the primary premise. The Obama Administration’s proposal, as espoused by Secretary Geithner and Mr. Frank’s legislation, goes beyond fraud and deceptive practices. After giving fraud the obligatory lip service, the proposal moves fast forward into market intervention. The first red flag is the attempt to address the promotion of fair, efficient, and innovative financial services. I’m sorry but market efficiencies are created in response to financial factors such as cost and price of the service.
How government intervention via a supposed piece of consumer protection legislation is to bring this about has not been articulated by Congress or the Administration. Creating efficiencies through regulation typically requires government specifying allowances for certain costs, expenses, assets, and rates of return. Do we really want a consumer protection bill to go that far?
In addition, isn’t the financial melt down partially to blame on consumers? There should be no expectation that a consumer protection bill will require that consumers take some accountability to protect themselves. There is but only so much blame that can be placed on derivatives and other pieces of faulty financial engineering. The type of intervention that we eventually end up with only leaves one answer for the first question; a resounding no.
Will this new agency work? From an experience level such an agency may work for two reasons. First, the bill envisions stripping the Federal Reserve Board and the Federal Deposit Insurance Corporation of their consumer protection responsibilities. This may indeed free up personnel from the Fed and the FDIC who are experienced in consumer protection regulation to work at the new agency. Second, regarding the proposed agency’s monitoring responsibilities, a number of financial analysts who lost jobs on Wall Street may be able to put their skills and contacts to good use within such an agency.
From a market failure standpoint, however, such an agency, given its two-pronged approach to consumer protection, may find itself not only a regulatory schizophrenic, but also bring about the market failure it presumes to try to stem. Monitoring risk will lead to regulating risk. It is risk that lies at the base of creating and pricing innovative financial products. A consumer protection agency that tries to reduce risk will eventually spawn a market that does not provide innovative services and credit to consumers. This is market failure.
The other point of failure would be the lack of consumer accountability. This bill basically takes consumers of the hook for becoming financially literate and disciplined. The bill creates another "John Wayne" riding over the hill to save the hapless settlers. It is unclear why in a society with so many available and relatively inexpensive sources of information we need an uber-regulator to hold the hands of American consumers.
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