The proposed CFPA, Consumer Financial Protection Agency, is one of the hottest debates going on in Washington today. Left partially in the background by the health care debate, it is no less a significant threat to markets, the economy, and America's financial future. Judge Richard Posner wrote in The Wall Street Journal on Wednesday:
The [CFPA] would have regulatory authority over retail financial products such as mortgages and credit cards, with the aim, the bill says, of ensuring that consumers "have, understand, and can use the information they need to make responsible decisions." But the agency will go beyond the conventional consumer-protection function of providing information. It also will design "standard" consumer financial products that will contain whatever "features or terms [are] defined by the Agency for the product or service."
The seller of a mortgage or credit card, for example, will be required to offer the customer the agency-designed product. And according to the bill, the agency can forbid the seller to offer his own product if the offer would “cause substantial injury to consumers” that "is not reasonably avoidable by consumers and . . . is not outweighed by countervailing benefits to consumers or to competition."
Still, there are many who support the idea. MIT economist Simon Johnson wrote in The New York Times yesterday morning:
What happens when there is a scare regarding food contamination in the United States or globally? People buy less of that food until the government assures them that: 1) we now understand the cause of the problem; and 2) it will not happen again.
Word has gotten around that many financial products are not safe — as well as the idea that the debt levels encouraged by the finance industry are not always healthy. Consumers are going to be more careful and, if there is no way to reassure them fully, they may be excessively careful.
While I have reservations about the growing power of the Federal Reserve, I ultimately side with Fed chair Bernanke on this issue. He testified before Congress this past week and said that consumer protect fits best under the umbrella of the Fed because it works complimentary to other roles of the Fed. Now, if we were going to strip all power away from the Fed except monetary policy, I'd be in favor of a joint consumer protection-banking industry regulator. But aside from that, having a stand alone CFPA is a very bad idea.