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Senator Chris Dodd’s financial “reform” bill is 1,300 pages of regulatory expansion, including moving the boxes on the regulatory organization chart. Among its organizational results would be the “Consumer Financial Protection Bureau,” an agency thinly disguised as part of the Federal Reserve Board, but obviously designed to be in fact an aggressively independent operation. It would be more honest to drop the attempt at disguise.
Any objective observer of government agency behavior would predict this one becomes a large, very expensive, highly intrusive additional financial bureaucracy, with arbitrarily expanding demands, which will impose heavy costs on consumer financial services and requirements that likely conflict with those of other financial regulators. Where the parties differ about this proposal is that some people like such a bureaucracy, and some don’t.
Treasury Secretary Timothy Geithner, in remarks at AEI in March, said that the Consumer Financial Protection Bureau would be “overwhelmingly focused on improving disclosures, so consumers can have better ways of making informed choices.” Indeed, providing clear, straightforward key information, so that borrowers can exercise greater personal responsibility in making decisions to undertake debt commitments, is an excellent goal. But it does not require a new agency.
Moreover, with all due respect to the secretary, I doubt that this would in fact be the “overwhelming focus” of such an organization as it would inevitably evolve.
Consider a new, independent regulatory bureaucracy filled with ambitious officers and staffers who are interventionist by ideology, believers that people need to be guided for their own good according to the tenets of “behavioral economics,” social democratic by faith, and closely aligned to numerous “consumer advocates.” They will hardly be content with the project of “improving disclosure,” important as that is.
They will ineluctably embark instead on allocating credit in terms of “improved access” and “fairness.” In other words, they will promote expanding riskier loans, in spite of the fact that making people loans they can’t afford is the opposite of protecting them.
This is why, if such an organization is to be created, it is absolutely essential that it be truly part of, and subordinate to, a regulatory body also charged with financial prudence, safety and soundness, and balancing risks. Better would be not to create it at all, but rather to centralize the responsibility for clear, straightforward key information in a relevant existing regulator"”the Federal Trade Commission, for example.
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