Would Reducing the Flow of Credit Be So Terrible?

David Frum says conservatives shouldn’t be trying so hard to gut derivatives regulation (I agree) and should pour more energy into trying to gut consumer financial protection:

That does not mean that the bill is fine. Democrats have tethered derivatives regulation to another project, the creation of a new agency to regulate and protect consumer credit. That’s a seriously bad idea that will tend to constrict the flow of credit to households and small businesses. Yet it’s the new consumer-protection agency that seems to be the least controversial element of the Democrats’ proposal. Meanwhile it’s the elements of the bill that address Hernando’s concerns that are the most controversial with Republicans and the right. Curious, huh.

I have, frankly, the reverse concern about the CFPA idea — that in practice it won’t amount to anything. I also don’t see any reason to believe that CFPA will reduce credit to small businesses, who aren’t within it’s regulatory ambit. But if a CFPA does reduce the flow of credit to households, will that be such a bad thing? I feel like one of the constructive things some conservatives have tried to inject into the financial regulation debate is the point that irresponsible behavior on the part of borrowers was part of the problem and was cheered on at the time by some progressives as a way to expand low-income and minority homeownership.

When I look at the chart above of growing household indebtedness, I don’t think to myself “heaven forbid we reduce consumer access to credit.” Instead I think “leverage got out of control at the household level as well as on Wall Street.” And we have evidence that high levels of household debt were an important driver of the recession. If the price to be paid for crackdown down on financial scams is a mild overall decrease in the amount of consumer debt that seems fine by me. Indeed, paired with an Affordable Care Act that should sharply limit the amount of medical-related debt people accumulate, I think we’d be putting the country on a much firmer footing going forward.


If I have doubts about the CFPA it’s specifically that I’m skeptical the trigger will actually be pulled on anything that would do what Frum fears, and basically nothing will change. It’s also worth re-reading Elizabeth Warren’s original article on the subject which really outlines some rather modest goals for a CFPA — mostly making sure people actually understand the contracts they’re signing.