'Consumer Protections' Achieve the Opposite

Thursday, October 22, 2009

Mark A. Calabria, director of financial regulation studiesmcalabria@cato.org:

On the Consumer Financial Protection Agency Act of 2009:

Perhaps this proposal's greatest flaw is that it will do nothing to avoid the next financial crisis and would not have avoided the current crisis.

The housing bubble was driven by a lack of equity on the part of borrowers, coupled with a speculative bubble in housing and increased unemployment resulting from the bursting bubble. Nothing in this proposal would require borrowers to actually have "skin in the game." In fact, the proposal would increase the chance of future bubbles by allowing borrowers to keep the upside of speculative credit activity, while pushing even more of the downside risk onto others.

The proposal also begins a dangerous new precedent for legislation: the agency's activities would not be funded by appropriations, as is, say, the Consumer Product Safety Commission. It would be largely funded by the Federal Reserve's balance sheet. This will eliminate any accountability of the agency to the American public, just as the Fed's bailouts have lacked transparency and accountability.

The new agency would have almost unlimited power to decide which industries and products are covered, with the exception that products offered by Wall Street—the very Wall Street at the center of the financial crisis—would not be covered and would continue to be regulated by the Securities and Exchange Commission (SEC).

On the Expedited CARD Reform for Consumers Act of 2009:

Credit cards allow the un- or under-employed to spend now out of future expected income, which is key during a financial downturn. But the credit "reform" proposal under consideration would have the effect of limiting credit solely to the financially stable, leaving those most in need outside of our formal financial system. This would force needier households to borrow from less efficient, and often more costly, sources, such as friends and family, or pawn-shops and loan sharks. The trend in recent months of households shifting away from mortgage debt to credit card debt has been essential in allowing households to maintain spending in the face of declining home values; absent such spending, our economy would be in even worse shape.

Of course, financial contracts are like any other form of contract: they should not be allowed to abrogated by courts merely on the basis of politics.

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