Tomorrow, as part of its plan to overhaul the nation’s financial regulation system, the Obama administration plans to announce the creation of a new consumer protection agency. According to CNN Money, “its mission will be to protect consumers from deceptive or dangerous mortgages, credit cards and other financial products.”
“It’s bad for the consumers,” said Steve Bartlett, president of the Financial Services Roundtable, a lobbying group for banks. Financial industry advocates object to the idea of carving out the enforcement of consumer protection from the mandates of existing regulatory agencies that oversee companies. They argue that consumer protection is intertwined with ensuring that a financial firm is on stable footing. “Give the power for consumer protection to the agencies that have real power,” Bartlett said.
But the current economic mess has revealed that the “agencies that have real power” actually don’t have any power, particularly when it comes to consumer protection. They are simply too far removed from the action to get an adequate sense of how financial products are being marketed to consumers on the ground level. They are looking out for the safety of institutions, not the well being of an individual consumer getting suckered into a bad mortgage or credit card deal.
As Professor Elizabeth Warren — a staunch advocate of a consumer protection council — told The Wonk Room, “all these lousy mortgages got sold, one family at a time…If we had had just basic safety standards in place from the beginning, then we never would have fed these into the front end of the financial system.” And that’s the point of the new council — to watch the origination of these products. Various states tried to regulate mortgages at the ground level back in 2002 and 2003, and were effectively stopped by the Bush administration’s regulators. How many toxic assets would have never found their way into the system if those efforts had been allowed to proceed?
One financial services lobbyist who spoke to Reuters predicted that the consumer protection agency will be stripped out of the final regulation package. If that happens, it will be to the detriment of consumers and to the advantage of the banks that are throwing their weight around Capitol Hill.