You may have heard some of the arguments against the CFPA:
- it will thwart innovation of financial products
- it will harm choice, including choices for low-income consumers
- it will add an unneeded layer of regulation
It should not be surprising that a lot of these arguments are made by people who have a friendly view of big
banks and financial institutions. The fight is on. The big money is flowing to members of Congress on key committees. Consider some of the sums going to Congressional leadership from financial institutions:
- Barney Frank (D-Ma): $1,018,648
- Paul Kanjorski (D-Pa): $1,1251,636
- Carolyn Maloney (D-NY): $675,280
- Luis Gutierrez (D-Il): $92,230
- Dennis Moore (D-Ks): $618,389
- Melissa Bean: (D-Il): $925,225
- Ron Klein: (D-Fl): $898,988
- Ron Paul: (R-Tx): $1,310,120
- Spencer Bachus (R-Al): $921,975
- Jeb Hensarling (R-Tx): 632,154
All of these figures come from the Center for Responsive Politics and represent the 2008 contributions to these leaders from financial sector institutions. The 2009 sums are also daunting.
That said, regulatory reform for our financial institutions is no longer an "inside baseball" ( an idiom that says that something is of interest only to insiders) issue. The public sees the cost of unfettered innovation. Our communities have been hit with scores of foreclosures. Defaults on credit cards are skyrocketing. Many people are not working, or working less.
The CFPA isn't just a piece of legislation that matters to bankers. Regulatory reform now appears to be driven by a broad sense of its role in insuring the safety and soundness of the financial system
Let's go over those arguments that seek to undermine reform:
It will hinder innovation: This sounds plausible, but the truth is that in many instances, the presence of regulation actually creates an enviroment that fosters innovation. The pharmaceutical industry, for example, has grown dramatically in spite of the oversight of the FDA. In fact, without the imprimatur of the FDA, consumers might view new drugs with the skepticism associated with snake oils and witch doctors.
The evidence that such fear remains within financial services is reflected in the huge demand for financial advice. The popularity of financial literacy experts like Suze Orman, Robert Kiyosaki, and Michelle Singletary suggest that people are seeking advice on how to navigate a world that they are not entirely comfortable with, and for which there is not a satisfactory regulatory agent.
Moreover, even the "smartest guys in the room," didn't get it right on these innovative products. The truth is are not rational (pdf), and perhaps not at all competent, in making accurate assessments about risk.
It limits choice: right now, consumers have a lot of choice, but its often not real choice. For example, consumers have the "choice" to accept mandatory arbitration and unusual credit card billing tactics. Yet, its not really a choice, because the alternative to these features is simple: no product. If a consumer does not accept double-cycle billing, many credit card companies will just tell you to pay off your balance and close your account. Brad Miller challenged an industry representative to give one example of when a consumer wanted double-cycle billing. The representative could not name a person.
It just adds another layer of regulation: for years, our government has offerered regulatory agencies that have chosen to not enforce our banking laws. Wachovia v. Watters enabled this approach, but for years prior to that, federal agencies insisted in their right to pre-empt efforts by states to enforce banking rules within their borders. CFPA creates a new regulatory agency, true, but one is needed.
A more accurate conclusion is that our regulatory institutions did not provide adequate protection for our economy. Genuine problems were evident. The lack of action was frustrating. Moreover, regulators made it clear that lending agreements negotiated by non-profits were not binding or relevant for the purposes of CRA examinations.
The free market developed innovations like cash-out stated-income loans. Maybe that was something that somebody should have addressed, eh? The CFPA, for whatever flaws it might have, represents a chance to address those failings.