At The American Prospect, Tim Fernholz noted that Sen. Chuck Grassley (R-IA) has engaged in a bit of confusing rhetoric regarding regulatory reform. Grassley seems to simultaneously believe that the Federal Reserve should do nothing but monetary policy, but shouldn’t have its consumer protection responsibilities removed and placed within a new Consumer Financial Protection Agency (CFPA).
As Fernholz wrote, “thank goodness Grassley is not on the relevant committee” (the Senate Banking Committee). However, Grassley is not the only one with this contradiction running through his head. Sen. Jim Bunning (R-KY) is struggling with the same thing, and has a seat on the Banking Committee, from which he announced today that he sees “very little chance of getting a consumer protection agency past this committee.” And his reasoning is that the Fed already has consumer protection duties that it simply didn’t use:
In 1994, we handed the Federal Reserve the power to regulate all banks and mortgage brokers on the loans that they make. That’s all of them! In 1994 they didn’t do a thing…Now, why would we write a new protection agency, if they’re not using the power we have to the Federal Reserve to start with?…They didn’t do their job, and now you want to create a new institution because the Federal Reserve didn’t do their job. I say you’re wrong to create a new institution. We should insist that the Federal Reserve does their job.
But just a few months ago, Bunning declared that the Fed should not be designated as a systemic risk regulator for the financial system because “the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go.” In fact, he “promised to do everything in his power to stop the Fed.”
So the Fed has proven that it can’t be trusted, but it should still be trusted to protect consumers? There’s an odd dynamic at work here, because Bunning’s diagnosis is spot-on — he just comes to the wrong conclusion. The Fed undeniably failed to police the consumer market, even though it clearly had such powers. It received regulatory authority over mortgage lending in 1994, but didn’t release its “Guidance on Nontraditional Mortgage Product Risks” until 2006. This lackadaisical approach to consumer occurred not just within the Fed, but with all of the federal bank regulators.
Therefore, we should take consumer protection duties away from all of them and place them within a new agency, which will have no mission other than watching out for consumers. But Republicans — who love to hate the Fed the rest of the time, because it plays well politically — are willing to give the Fed another swing of the bat when it comes to protecting consumers.