It’s no secret that the Obama administration is planning an overhaul of the way in which the financial services industry is regulated. House Financial Services committee chairman Barney Frank (D-MA) has said that the reform package will hopefully be in place by the end of the year and that “we plan to start voting on this by the end of June.”
Much of the discussion about regulatory reform has focused on what to do with the big banks and how to end too-big-to-fail. But Professor Elizabeth Warren — a bankruptcy expert and Chair of the TARP’s Congressional Oversight Panel — said that efforts at regulatory reform can’t be aimed solely at the banking behemoths, because that won’t provide adequate protection for families. In an interview yesterday with The Wonk Room, Warren explained that reform also needs to occur at the consumer level for products like mortgages:
We need to think at the product level. All these lousy mortgages got sold, one family at a time. These were crummy mortgages, like selling plastic spoons that have carcinogens in them or toys that put out little children’s eyes. We sold them one product in 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, where they then would have been bundled up and then sliced into tranches and rated and rebundled and sold and rated again…And so the most important thing I can say is that it is not enough to regulate banks simply from the point of view of the Fed or the OCC…We have to look at those products.
Once upon a time, state governments actually tried to regulate mortgage originations at the ground level, but the Bush administration exempted national banks from state regulations, effectively blunting the states’ regulatory push.