(2 of 2)
Of course, it's fair to wonder why bank lobbyists would be so concerned about the CFPA failing to protect their customers from exploitation. And agencies like the OCC can be expected to protect their turf. But the status quo just isn't working, and history suggests that consumer protection will never be a top priority at agencies primarily responsible for ensuring the financial health of banks. The CSPC, FDA and EPA aren't perfect, but their clear missions have made them much less susceptible to capture by industry, and much more attractive to employees who are serious about enforcement. That's the appeal of a financial agency exclusively devoted to protecting consumers.
The CFPA wouldn't address the root causes of the crisis.
Warren argues that the financial meltdown of 2008 was essentially a consumer-protection meltdown, a direct result of exploitative loans that never should have been approved. It's certainly true that the securities that sparked the crisis began imploding after subprime borrowers began struggling to repay the underlying loans. Still, the notion that a CFPA would have prevented the mess is debatable at best. It's not as if all borrowers who bit off more than they could chew were deceived; many of them just wanted more house than they could afford, and it's not clear whether an agency devoted to helping consumers would have pushed for stricter scrutiny of their credit histories, higher requirements for their down payments and other borrowing restrictions that might have helped save them from their own bad instincts. In any case, it's hard to imagine how the subprime crisis would have metastasized into a financial collapse if banks hadn't been so big, interconnected, complex and overleveraged — problems that had little to do with consumer protection.
So the argument that better consumer protection will prevent the next collapse is no slam dunk. But better consumer protection is still a good idea! And the CFPA is a clear way to send a message that the economy is supposed to work for ordinary families. We should have a CFPA — and also size restrictions, stricter leverage rules and capital requirements, better regulation of complex derivatives, an orderly mechanism to wind down failing firms without bailouts and all the other elements of financial reform.
Insisting on the CFPA will doom the cause of reform.
The argument here is that reasonable people can disagree on the importance of a new consumer agency, but it's not a realistic goal, because Republicans have declared it a deal breaker. Even before the Massachusetts election, Democratic Senate leaders had decided not to reprise the horse-trading it took to get them 60 votes for health care reform. They want a bipartisan bill, and there's no way that will happen with the CFPA. Why not ditch it?
Because there's no guarantee that ditching it will ensure a bipartisan bill. Health care was telling: Republicans called the public option a deal breaker, but once the public option was deleted, they found new excuses for obstruction. They say financial reform is different, but it's worth noting how many Republicans supported it in the House: zero.
Senator Christopher Dodd, the Democratic chairman of the Senate Banking Committee, recently broke off negotiations with Senator Richard Shelby, the ranking Republican, a politician so committed to bipartisanship that he placed a hold on all Obama Administration appointees to extract some pork for Alabama. Now Dodd is trying to negotiate with Senator Bob Corker of Tennessee, who said in a recent interview that he truly believes an agreement is possible. But in that same interview, Corker described some modest Administration proposals — like giving consumers the option of a simple "plain-vanilla" mortgage — as "way, way out in left field." He also said that when Obama proposed a small tax on large banks to recoup the costs of the bailouts, he wondered if he was living in the U.S. or Venezuela. And he's considered the most compromise-friendly Republican.
Realistically, the only way Republicans are going to support a financial-reform bill is if they conclude that they're going to pay a serious political price for obstruction. And they're only going to pay that price if they're perceived as anticonsumer; the finer technical points of derivatives regulations or proprietary trading are not going to move the masses. A new bureaucracy might not scream populism either, but it's probably the best way to portray a vote on reform as a choice between the banks and the people.