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On preemption

I've been a bit curious as to why financial reformers are so intent on securing "state preemption": In most cases, a federal standard is more protective than 50 different state standards. Luckily, Mike Konczal writes up his thoughts on the matter today and they're mostly convincing. I'm not as certain as he is that corruption is more of a problem for federal regulators than state regulators, but if the system is constructed so that you're forced to choose the stronger of the two regulatory schemes, that's fine.

By Ezra Klein  |  May 12, 2010; 4:15 PM ET
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As someone who works on the edges of "financial services", you greatly underestimate the difficult in comforming with 50 different state laws. I would personally prefer a strict federal law INSTEAD of a hodgepodge of 50 other laws. But both together is a nightmare. NY says "you can't charge a fee for A, but you can for B". California says "you can't charge a fee for B, but you can for A". End result? You cannot offer a nationwide product. Which makes the entire system more inefficient, and more costly for consumers.

Posted by: WEW72 | May 12, 2010 4:56 PM | Report abuse

A better solution is to allow state AGs to enforce federal law if the relevant federal agency passes on an investigation.

Posted by: WEW72 | May 12, 2010 5:04 PM | Report abuse

The antithesis of efficiency is often reliability. One reason for having states is to promote reliability of the federation as whole: by favoring efficiency -- regulation at a single point -- the reliability gained by multiple independent parallel systems is lost. This is particularly true for library regulation, medical regulation, etc.

A dated, but still useful, discussion is found in NAVAIR 00-65-502/NAVORD OD 41146, Reliability Engineering Handbook, Naval Air Systems Command and Naval Ordinance Systems Command (March 1968). The publication deals with physical systems, but the concepts extend. Another useful discussion is ch. 13 of Blanchard & Fabrycky's Systems Engineering and Analysis text.

Posted by: rmgregory | May 12, 2010 5:11 PM | Report abuse

Multiple (and independently useful) tests might improve reliability. However, all states and the federal government are not working towards the same goal. Some states have very different views on consumer protection. In a national economy, allowing New Hampshire to be the "lowest common denominator" which governs all national products (thus raising prices for the other 49 states)seems fairly undemocratic. Its bad enough when its California acting in that capacity (which though big, almost certainly does not reach the same "balance" of reliability and efficiency that the rest of the country would prefer).

Posted by: WEW72 | May 12, 2010 5:20 PM | Report abuse

This is a huge issue. It seems to be treated as a minor detail here.

There is strong evidence that states with stronger consumer protection laws saw lower mortgage default rates, until the OCC aggressively preempted state laws. See

As for the "burden" argument; it is the same old saw that was used by the OCC and OTS to justify their preemption moves in 2003/2004.

Moreover, lenders are already subject to 50 different sets of real estate and foreclosure law and they do fine. I don't think that slowed lending down much in the 2000s did it? In fact, a fed study from a coupel of years ago found that states with less lender-friendly foreclosure laws saw (very) slightly smaller average loan sizes, controlling for other factors. The authors interpreted this as a bad thing, i.e, that borrower-friendly foreclosure law would result in (slightly) smaller loans. But many others, especially in retrospect, interpreted this as a good thing (less aggressive/risky lending).

A key argument against preemption is that it is much easier for the financial industry to control Congress (perhaps not right this minute, but just wait a year or two!) than it is to control 50 state legislatures, or at least legislatures in states that are more prone to be tougher regulators, e.g., NY, Massachusetts, and some others. The adoption of a good number of decent state subprime lending regulations in the early 2000s (the same ones that were preempted by OCC/OTS), is evidence here.

Posted by: idw3 | May 13, 2010 4:52 PM | Report abuse

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