In July, the Consumer Financial Protection Bureau (CFPB) formally begins operations. Republicans oppose President Obama's top choice, Elizabeth Warren, to head the new bureau, which should not have been created in the first place. The CFPB will drive up prices, but won't actually protect consumers.
Consider first the sheer implausibility of this "reform." Consumers who feel they are being ripped off by powerful forces are looking to Washington politicians to save them? Since when does anything coming out of Washington resemble integrity and financial prudence? The CFPB's own website makes that point.
"If you've ever applied for a credit card, a student loan, or a mortgage, you may have felt like you were signing your name to pages of incomprehensible fine print - and weren't quite sure what was in there." This is an ironic plug for the bureau, since the 2010 Dodd-Frank Act that created it was a 2,300-page piece of legislation that few lawmakers actually read cover to cover - and the impact of which is still being debated.
This is also not the first time government has rolled up its sleeves and promised to protect hapless citizens from rapacious businessmen. (This time, they mean it!). After the Enron, Tyco and other accounting scandals, the 2002 Sarbanes-Oxley Act imposed tough new reporting requirements on businesses. In addition, the Securities and Exchange Commission (SEC) enjoyed average funding increases of 11.3 percent (not adjusted for inflation) per year during the George W. Bush administration. And what was the result of these tough new rules and extra funding for enforcement?
Bernie Madoff managed to pull off an outrageous Ponzi scheme, bilking $50 billion from investors, even though private players such as Harry Markopolos were writing letters to the SEC since 1999 warning about him. It's also important to remember that a crack team of government regulators did not stop Madoff, who was arrested only after his own sons turned him in. As the Madoff episode confirms, just because the government throws money at the problem and passes an impressive new law with sweeping powers doesn't mean things will actually improve.
After the fact, it's obvious that many consumers ended up taking out mortgages they never should have gotten in the first place. But why would a CFPB have stopped that practice had it existed a decade ago? Both former Federal Reserve chairman Alan Greenspan and current chairman Ben S. Bernanke publicly denied the existence of a housing bubble, even when it was well under way and many economists in the private sector could tell a crash was brewing.
The CFPB's proposed interventions into the consumer financial market may sound nice in theory, but will yield unintended consequences. For example, a 2009 rule bans credit card companies from "arbitrarily" raising the interest rate on carried balances for customers who haven't missed a payment. This rule will be enforced by the new CFPB when it becomes operational. Although nobody likes seeing finance charges go up, the rule means credit card companies will have less flexibility when they think conditions warrant a rise in rates. Consequently, these companies will either charge higher initial rates, give smaller credit lines than they otherwise would have, or cut rewards programs, which many have already done.
The ultimate solution to potentially greedy businesses is the discipline of market competition. If the government really wanted financial behemoths to avoid a repetition of the scandalously lax lending policies of the housing-bubble years, then the Treasury and Federal Reserve wouldn't have bailed them out. In practice, the lesson for major players was this: During the next boom, make as much money as possible in the short term, not worrying about risk. Then if things blow up, hope that you've got enough friends in Washington to have taxpayers cover your debts.
It's naive to think a new federal bureau - whether headed by Elizabeth Warren or another Mother Teresa - will successfully avoid future crises and stay one step ahead of unscrupulous players. The best bet for consumers is to educate themselves and be prudent in spending and borrowing. The lesson for the feds is to learn from history and let the market weed out unscrupulous firms.
Robert P. Murphy is a senior fellow in business and economic studies for the Pacific Research Institute.
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