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I'm confused about the consumer financial protection agency

FunnyOrDie.com got a serious all-star cast together to produce this video in favor of the Consumer Financial Protection Agency.

Cute. And possibly the germ of a good "financial regulation ... and zombies" book. But the more I talk to people and think about Chris Dodd's CFPA compromise, the more confused I am. Conceptually, it's possible to tuck an independent agency into another agency and have it do its work. But that's not what's going on here. The argument over whether the CFPA should be independent or attached is an argument about whether it should be strong or weak. Otherwise, it's not a conversation worth having.

So insofar as the CFPA is being placed inside the Federal Reserve and its directives are being carried out by Federal Reserve regulators, it's being put into a place where it can potentially be ignored. Priorities are set by the top, not by the middle.

But as much as it's appealing to say that Democrats should walk away from the table and run on the CFPA, it's worth being real about what's going to happen in November: Democrats will lose seats. If they can get three-quarters of a decent CFPA now, they can maybe get one-quarter of one later. Or maybe they can't get one at all. It might be a good issue, but it's not an electoral game-changer.

Getting some sort of CFPA that's run by a presidential appointee and armed with an independent budget this year is better than not getting a CFPA at all. At least in that world, there's someone responsible for consumer products and theoretically empowered to do something about them. Making things a lot better is preferable to making them somewhat better, but making things somewhat better is preferable to not making them better at all, right?

Elizabeth Warren, the Harvard professor who came up with the idea for a CFPA, doesn't agree with that. "My first choice is a strong consumer agency," she said in an interview with the Huffington Post. "My second choice is no agency at all and plenty of blood and teeth left on the floor."

As I said, I'm confused.

By Ezra Klein  |  March 3, 2010; 5:37 PM ET
Categories:  Financial Regulation  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Members of Congress get the same choices as the rest of us
Next: What Reagan deserves

Comments

I'm with Elizabeth Warren on this one- the last thing you want is the illusion of protection.

Posted by: Quant | March 3, 2010 5:53 PM | Report abuse

I think Paul Krugman summed the argument up pretty well on Monday in his column. Illusion of reform now = crisis later.

Posted by: RyanD1 | March 3, 2010 5:57 PM | Report abuse

I think its worse to have a "bipartisan" emasculated CFPA, than none at all. A crappy CFPA that a hypoclican (hypocrite republican, I just made that up) or 2 votes for just provides cover republicans to say they are working for main street and for banks to screw over customers while saying that the CFPA thinks what they are doing is OK.

This seems like a good place to draw a line in the sand and differentiate dems from repubs on who is looking out for consumers. After all, lots of regular people (not poligeeks like the people on this blog) have negative experiences with their credit cards, so this issue resonates in a way that health care or trade policy doesn't.

Posted by: srw3 | March 3, 2010 6:03 PM | Report abuse

The other thing that resonates is that we just shoveled trillions toward the banks and everybody knows it. Asking the banks to give a little on how they treat their customers and putting someone in charge of seeing that it happens feels fair at a visceral level.

The mortgage meltdown is also affecting many people. If the CFPA can be shown to address the power imbalance between individual consumers and big banks, it becomes a winning issue.

So there are many reasons to pick a fight with conservatives around banking regulation.

Posted by: srw3 | March 3, 2010 6:09 PM | Report abuse

At 0:51, they clearly have a Cubs mug on the table. But Obama's a White Sox fan!

As a result, I found the clip hard to believe.

Posted by: eelvisberg | March 3, 2010 6:10 PM | Report abuse

Ten years from now, after the economy collapses again and Wall Street gets bailed out again, Frontline will do a story on Elizabeth Warren and how nobody would listen to her concerning the importance of a CFPA with teeth. You'll see.

Posted by: troyaikmanisgod | March 3, 2010 6:20 PM | Report abuse

Here is my explanation of why it makes sense to pass the imperfect health care reform bill, but not the (far more) imperfect finance reform bill (if it ends up being really weak).

1) We don't live in simple world where any optimizing rule has no exceptions. In a complicated world, or an extremely complicated world, often what optimizes is highly case by case, and simple minded rules with no exceptions often lead to extremely sub-optimal decisions.

2) So what are the specific, case by case, arguments here? It largely comes down to expected public learning and response to a bills passing. If the health care reform bill passed. It would be an enormous step forward and it would really show the public that we can have a universal health insurance program, with subsidies that make insurance far more affordable, and sizable regulations, and controls to lower costs, improve quality, and protect patients. We can do all this and not become socialist with some kind of caricature of Soviet medical care. It would enormously debunk Republican propaganda and outright lies through clear first hand demonstrations that every American would see regularly in their everyday lives. In this way it would be like the passing of Social Security and Medicare which the Republicans had scared so much of the public into thinking would be a socialist disaster, but once were actually tried the propaganda and lies almost instantly dissolved and there was no turning back; the programs were only steadily strengthened and improved greatly.

A very weak finance regulation bill, by contrast, is something few voters could understand or feel its direct effects. Its weakness would lead to little improvement and another financial disaster, so then voters would tend to not think much of financial regulation in general, or would even be convinced by Republicans that it caused the next financial crisis. So this is a bill that may be so weak, as well as technical and esoteric, that voters can't experience its positive effects, so it won't lead to positive feelings and learning about the concept. It's almost certain failure could easily lead to the opposite. At the same time, if Republicans vote as a block against a good bill, resulting in nothing, this can really hurt their public support.

Posted by: RichardHSerlin | March 3, 2010 7:26 PM | Report abuse

3) The health care reform bill would do immensely more good than the kind of weak finance reform bills that are being talked about.

4) As a result of the above, a very weak finance bill failing could result in another crisis, in say five years (or less), and then a truly strong bill passing as a result. But a very weak finance bill passing could still just about as easily result in a crisis in the same time, but then a strong bill passing in response would be a lot less likely. The Republicans would not be hated for having stopped the last bill and doing nothing, and they could say the regulation of the last bill proved regulation doesn't work, and can't work – in fact it caused this crisis!

So, passing a very weak finance bill is likely to decrease the odds of passing a strong one in the near future.

But, health care is a totally different case, not passing a health care bill today will mean giving up a pretty big, strong, highly positive bill, not a very weak one, and it will create the positive feelings and first hand demonstration and debunking that will INCREASE – not decrease – the odds of a having a really strong program in the near future.

Posted by: RichardHSerlin | March 3, 2010 7:27 PM | Report abuse

A good comparison might be the rating agencies. I think it's clear that, in this financial crisis, the rating agencies we had were in fact worse than no rating agencies at all; those fraudulent AAAs they slapped on everything that came their way created a false sense of confidence in the market. So while it's not clear to me whether or not a weak CFPA would actually be worse than none at all, you can at least see the logic of the argument.

Posted by: CynicalJerk | March 3, 2010 7:37 PM | Report abuse

So far you lay out three choices:
(A) A strong CFPA
(B) A watered down CFPA
(C) No CFPA with "plenty of blood and teeth left on the floor"

But there is also a fourth possibility:
(D) CFPA given up without a fight

Most of us here prefer (A) and least want (D). For mee then, the question becomes (B) vs. (C). I think I would prefer losing CFPA in a fight, but I worry that there will be no fight and we end up with the least desirable outcome.

Posted by: danwhalen2 | March 3, 2010 8:02 PM | Report abuse

I agree with RyanD1 here. Krugman's not confused.

Take a read and dissuade your confusion:

Financial Reform Endgame
http://www.nytimes.com/2010/03/01/opinion/01krugman.html?partner=rssnyt&emc=rss

"There are times when even a highly imperfect reform is much better than nothing; this is very much the case for health care. But financial reform is different. An imperfect health care bill can be revised in the light of experience, and if Democrats pass the current plan there will be steady pressure to make it better. A weak financial reform, by contrast, wouldn’t be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action — then fail in the clinch.

Better, then, to take a stand, and put the enemies of reform on the spot. And by all means let’s highlight the dispute over a proposed Consumer Financial Protection Agency.

...In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act."

I think that when you have Krugman and Warren team up against Klein on this issue, it's pretty straightforward who isn't confused, and whom to listen to.

Posted by: jc263field | March 3, 2010 9:15 PM | Report abuse

I think the crux of the problem here--and this is how this situation differs from HCR--is that once you've established a regulatory agency, you've given the consumer a sense of protection, one that in the case of Dodd's proposal would be relatively impotent; yet the results of this feebleness won't show themselves until a new bubble is produced.

This is not true of HCR. In that realm, you have higher consumer costs, rising Medicare costs, with their subsequent implications for taxpayers, you have lack of coverage, &c. These are pressures that drive continuous reform. If you have a merely nominal protection agency in place now, the next time you'll see pressure for reform will be when another (and perhaps more deleterious) crisis occurs, causing multi-generational suffering; and it may be that your calls for reform will be taken less seriously then because the last attempt didn't work out so well.

In short, financial regulation, unlike HCR, potentially permits a dangerous semblance of safety. To make a metapohor: it masks any symptoms of cancer until it (the cancer) has spread, metastasized around your aortal artery, and can't be surgically removed.

Posted by: agowen100 | March 4, 2010 2:19 AM | Report abuse

Ezra,
It's time for an update to add in the final Warren word that was inexplicably left off,

"My 99th choice is some mouthful of mush that doesn't get the job done," Warren said.

Posted by: grooft | March 4, 2010 8:01 AM | Report abuse

The problem with your analysis is that what you see as making things "somewhat better" is, realistically and practically, making things absolutely no better at all, but providing politicians a rug to sweep the matter under.

This is roughly what Paul Krugman had to say about it in his column the other day, and I agree.

With health care, the Senate bill is nothing more than a bandaid to put over a gaping wound... perhaps you can make it a bigger bandaid, but that's still all it is. But a bandaid will still help alleviate the problem, even if it won't solve the problem, and thus it's true to say it's better than nothing in practical terms.

But adding a regulatory section to the Fed tasked with providing protection that the Fed was already tasked with and willfully failed to accomplish does not help alleviate anything. It's shuffling deck chairs on the Titanic. It's giving the same guy (metaphorically) who failed at a job a slightly different title and an office down the hall, and hoping this time he'll be good at it.

And politically, I think the voters are sick of their representatives in Washington finding new and creative ways to sweep things under the rug, rather than new and creative ways to actually address them.

Posted by: burndtdan | March 4, 2010 10:03 AM | Report abuse

No issue is more critical to ensuring our nation’s long-term economic health than addressing America’s dysfunctional financial regulatory system. Unfortunately, like so much legislation lately, the Obama administration’s economic reform agenda has fallen victim to prolonged partisan gridlock in the Senate.

As a compromise, Senate Banking Committee chairman Chris Dodd (D-CT) suggested burying the agency within the existing framework of the Federal Reserve.

However, even this major concession isn’t enough to satisfy Senator Richard Shelby (R-AL). The senior senator from Alabama’s stubborn refusal to adopt common sense consumer protections provides further evidence of the Republican Party’s prime directive: protecting the interests of large banks, corporations and the rich at the everyday American’s expense.

Passing a financial regulatory reform bill that includes both the Volcker Rule and an independent Consumer Financial Protection Agency is essential to preserving our nation’s economic stability.

The statements of a former Federal Reserve chairmen, Five former Treasury secretaries, a Wall Street CEO, at least one U.S. Senator and a Nobel prize winning economist all attest to this. Richard Shelby and his fellow Republicans owe the American people an explanation as to why they obtusely refuse to accept these crucial reforms.

Read more @ http://armchairfirebrand.wordpress.com/

Posted by: ArmchairFirebrand | March 5, 2010 3:29 AM | Report abuse

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