Irish philosopher Edmund Burke once famously said, “Those who don’t know history are destined to repeat it.” As Congress considers reforms intended to prevent breakdowns in our financial system, some of the ideas being pushed seem eerily reminiscent of past failures.
One such flawed idea is the administration’s proposal to create a Consumer Financial Protection Agency. Proponents of such an agency think the time has come to separate consumer-protection regulation from safety and soundness. (Bank regulators currently are charged with both responsibilities.) Though the proposal for an entirely new agency is a recent development, the idea of separating these two missions has been around for some time. In fact, this structure contributed to the catastrophic blunders known as Fannie Mae and Freddie Mac.
Fannie and Freddie were overseen primarily by the Office of Federal Housing Enterprises (their safety and soundness regulator) and the Department of Housing and Urban Development, which was responsible for enforcing the affordable-housing goals (akin to mission oversight). These “goals” mandated that the government-sponsored enterprises (GSE) dedicate a large portion of their portfolios to promote affordable housing throughout the country.
As we all know, this story didn’t end well. These affordable-housing goals of Fannie and Freddie (enforced by HUD) led the GSEs to purchase more than $1 trillion of so-called “junk loans.” These Alt-A and subprime loans accounted for roughly 85 percent of the mortgage giants’ losses.
When Fannie and Freddie started hemorrhaging money last fall, federal regulators stepped in and moved them into conservatorship, which may end up costing American taxpayers $400 billion.
Obviously, these affordable-housing goals were at odds with the long-term viability of these firms. This conflict occurred because these two agencies were tasked with entirely different (often conflicting) objectives.
We are now looking to apply that flawed model (with separate consumer-protection and solvency regulators) throughout the entire financial system. Will this create a more effective, safer regulatory structure? Our regulators don’t think so. Federal Reserve Chairman Ben S. Bernanke said he would leave consumer protection with the federal banking agencies if he were writing the regulatory reform proposal. The head of the Federal Deposit Insurance Corp., Sheila C. Bair, even has gone so far as to say taking this step could result ultimately in less effective protections for consumers. Virtually every federal banking regulator has vocally expressed concern over this idea, not because the regulators are trying to protect their regulatory turf but because it is a bad idea.
This proposal seems to ignore the fact that consumers benefit from a competitive market with adequately capitalized institutions that consumers know will be there down the road to make good on their promises. In many ways, solvency protection is the most effective form of consumer protection.
Going forward, it will be very difficult to create a separate government agency, charge it with consumer-protection oversight, and not expect politically driven mandates similar to the affordable-housing goals. If our warning signs are ignored and a CFPA is created with broad authority, expect to see similar unintended consequences come up that will distort our markets and work against safety and soundness regulation.
Instead of bifurcating the mission of the various regulators and repeating mistakes of the past, we should make certain our regulators are vigorously pursuing fraud and abuse in the market and ensure that consumers throughout the financial system have the tools necessary to make sound, educated financial decisions.
Rep. Ed Royce, California Republican, is a senior member of the House Financial Services Committee.