Republicans Propose Giving Fed Chairman Veto Power Over New Consumer Protection Rules

Sen. Judd Gregg (R-NH)

Sen. Judd Gregg (R-NH)

Sen. Bob Corker (R-TN) said yesterday that the Senate Banking Committee is “real close” to completing a regulatory reform bill, after a series of proposals went back and forth between Corker and committee chairman Chris Dodd (D-CT) regarding consumer protection. Instead of creating a new Consumer Financial Protection Agency (CFPA), Corker and Dodd are looking at placing a consumer protection division inside of the Federal Reserve (even though Dodd previously said that the Fed was “an abysmal failure” when it came to protecting consumers from deceptive lending).

Several Democrats have expressed skepticism with “the Fed option,” citing the central bank’s long history of neglecting consumers and ignoring warnings about pernicious bank behavior. But Republicans not only want to house the consumer protection division within the Fed. They also want to give the Fed Chairman veto authority over new consumer protection rules:

Senate Republicans had put forth a revised plan that Sen. Bob Corker of Tennessee had earlier offered, but with the support of Banking ranking member Richard Shelby and Sen. Judd Gregg, R-N.H. The plan is a modified version of one that would house the agency in the Federal Reserve, according to a knowledgeable source, but would give the Fed chairman the power on any sign-off for rule-writing, a provision needed to pick up Gregg’s support.

Incidentally, placing consumer protection within the Fed is the preferred choice of the banking industry.

It’s no surprise that Gregg is advocating for a stronger Fed role, as he has been one of the central bank’s staunchest defenders. But for Shelby to be running with this proposal is quite the turnaround, as just a few months ago he was one of the most vocal opponents of the nomination of Federal Reserve Chairman Ben Bernanke.

At the time, Shelby said that the Fed “fiddled while our markets burned,” and that its “poor oversight of our financial institutions and markets helped produce the greatest economic crisis this country has experienced in eighty years.” So has he changed his mind, or does he hold consumer protection in such low regard that he’s willing to leave it to an entity that he considers inept?

Meanwhile, even more senators have come out against the Fed option. Sen. Byron Dorgan (D-ND) said “it’s a horrible idea. It’s a terrible idea. I don’t support it and I’ll try to change it.” Sen. Bernie Sanders (I-VT) added that “consumers need real, real, real protection.” Indeed, giving the Fed’s bank regulators an effective veto over any new consumer rules leaves us with a system that looks exactly like the status quo, in which consumer protection is subservient to bank “safety and soundness” across the regulatory framework.

Sen. Chuck Grassley (R-IA) bluntly summed up what the Republicans are trying to do, saying yesterday that “there will be a bill, but it will be very much cut back from what the House passed.” And that seems to be where the bill is headed: “very much cut back” with very little justification as to why.