ON Monday, Senator Christopher Dodd unveiled his proposal to reform the nation’s financial regulatory system, including a new agency to protect consumers from predatory practices like teaser mortgages and misleading credit card contracts.
It’s a great idea, save for a fatal flaw. As a sop to Republicans, Senator Dodd’s plan lodges the agency in the very organization that dropped the ball in America’s consumer finance crisis: the Federal Reserve.
The Fed has a long and largely undistinguished history of consumer protection. During the 1970s, officials at the Fed opposed the Community Reinvestment Act, which attacked home lending discrimination, and the Home Mortgage Disclosure Act, which compelled banks to reveal their lending patterns.
When these became law, the Fed limply enforced them; it gave the same treatment to the Home Ownership Equity Protection Act, passed in 1994.
The Fed also sat on the sidelines during the housing bubble. Many Fed officials supported the explosion in subprime lending, and they seemed to look the other way as foreclosures soared in the latter half of 2006.
Even at the height of the crisis, Fed governors rarely mentioned consumer protection. Indeed, it wasn’t until two Democratic representatives, William Delahunt of Massachusetts and Brad Miller of North Carolina, proposed an independent consumer agency on March 10, 2009, that the Fed began to talk the talk of consumer protection; it’s probably no coincidence that the first public mention of consumer protection regulation by Fed officials in the entire aftermath of the financial crisis came on March 19, 2009, when a Fed governor, Daniel Tarullo, spoke about it at a hearing.
At this point, the Fed, and in particular its chairman, Ben Bernanke, seemed to find religion. Last July, it proposed rule revisions that would simplify the fine print on mortgages and highlight risky features of a loan. Two months later, it said that credit cards should be subject to similar regulatory reform, and Mr. Bernanke followed in October with a proposal for a council of risk regulators that would also oversee consumer issues.
It wasn’t all talk: according to its own data, the Fed’s enforcement actions against banks and lenders also began increasing over the past year, particularly after Congress took up the idea of an independent regulator. From a post-crisis average of eight announced enforcement actions per month, the Fed doubled its announcements to 16 actions per month once an independent agency was proposed.
But this new seriousness doesn’t mean the Fed is the right place for a consumer protection agency. For one, the Fed is above all concerned with inflation and other systemic risks to the economy; given a conflict between avoiding threats to the economy and consumer protection, is it reasonable or fair to expect it to choose the latter?
And, conflicts of interest aside, the Fed has yet to show it can truly protect consumers. Regulation is often a cat-and-mouse game in which officials must constantly anticipate how banks and lenders will respond to the government’s rules and activities and adapt regulation in turn. Reactive “regulation for show,” as we’ve seen from the Fed since March 2009, is not enough.
Senator Dodd’s proposal attempts to seal off the agency within the Fed, giving it rulemaking authority subject to the veto of a council of regulators. But independence will be impossible to enforce in practice, since nothing in the bill would prevent the Fed from lobbying the council or other regulators reviewing the bureau’s rules — and Mr. Bernanke and his colleagues would surely carry a lot of weight.
Embedding consumer protection in the Fed could be worse than imperfect. By giving the imprimatur of a consumer protection office to an agency that has long resisted consumer protection, Congress risks creating a false sense of security among policymakers and the public. The Fed’s politically reactive posture is the exact opposite of the sustained care that consumer financial protection demands.
No comments:
Post a Comment