Debate heats up over ‘financial protection agency’ proposal

From the Los Angeles Times (7/23/09)
By Tom Petruno

Harvard Law Professor Elizabeth Warren and Rep. Jeb Hensarling (R-Texas) are in a new smackdown this week over the idea of creating a federal Consumer Financial Protection Agency to oversee financial products and services.

The debate boils down to this: Can the government make people any more intelligent and responsible about borrowing money than, say, about the food they eat? Or would “protection” in this case mean banning altogether any products that agency bureaucrats decided weren’t fit for the lowest common denominator of potential users?

Warren, who has championed the concept of a CFPA since 2007, came out swinging for it in a post on the baselinescenario economics blog on Tuesday.

The timing wasn’t coincidental: There has been a strong push-back against the idea on Capitol Hill since the Obama administration embraced it months ago.

On Wednesday, Hensarling — who sits with Warren on the Congressional Oversight Panel for the financial-system bailout — wrote an op-ed piece for the Washington Times attacking the agency concept as “positively Orwellian.”

In her blog post, Warren sets out to bust what she asserts are “myths” about a Consumer Financial Protection Agency as she envisions it. Myth No. 1, she writes, is that the agency would “limit consumer choice and hinder innovation.”

Warren writes:

“The CFPA will not limit consumer choice. Instead, it will focus on putting consumers in a position to make choices for themselves by streamlining regulations, making disclosures smarter, and making financial products easier to understand and compare. The agency will promote plain vanilla contracts — short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure — it’s just a way to hide more tricks.”

But do we really need a new federal watchdog for that task? Warren thinks we do, in the wake of the credit market mess created by the proliferation of wacko mortgages:

“Today, seven different federal agencies have some form of regulations dealing with consumer credit. The result is a complicated, fragmented, expensive, and ineffective system. With consolidated and coherent authority, the CFPA can harmonize and streamline the regulatory system — while making it more effective.”

In his rebuttal, Hensarling says Republicans support the idea of simplifying disclosure forms for loans and other credit products. But he believes that a CFPA would hurt consumers by inevitably quashing innovation and choice.

He writes:

“It is doubtful how many financial firms will choose to invest in research, development and consumer testing on new products, only to discover later the CFPA deems them to be ‘unfair’ and thus unlawful. Had the CFPA existed 25 years ago, we would probably have no ATMs, frequent-flyer miles or debit cards. Functionally, a new federal bureaucracy will now be in charge of research, development and product approval for almost all new consumer-financial products.”

But Hensarling appears to be assuming that a CFPA would sit in judgment of every new product — as opposed to judging the disclosures that would be required in marketing the products.

Ultimately, he makes the case that having the right to choose the wrong product is better than having your choices limited by overzealous regulators. “As with any transaction, the cornerstone of consumer protection must be personal responsibility,” Hensarling writes.

Yes — except we all know that many or most financial products are sold, not bought: People often don’t know what they need, and either respond to slick marketing or to what seems to be the cheapest price.

Warren and Hensarling seem to agree on one point: The more fine print there is in sales and disclosure documents, the less likely anyone is to read any of it.

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