Thanks God For the Fact that Some Politicians Have No Filter

I am always struck by how few politicians have a filter between their brains and their mouths.  Usually this thought pops into my mind because a politician has stuck his foot in house.  Think Joe Biden.

But then sometimes this lack of a filter shows a politicians true colors or thoughts on an issue.  That is the case for Senator Bob Corker (R-TN).  He had been negotiating with Senator Chris Dodd, chairman of the Banking Committee on a financial regulation bill.  The biggest sticking point is whether to have a Consumer Financial Protection Agency (“CFPA”), which would do what the FDA and other agencies does–protect consumers from products that are sold to them–and how much power and  independence it should have.  As Harvard Law Professor Elizabeth Warren has stated:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner.

The House has already passes a financial regulation bill with a fairly strong, independent CFPA.  After talks broke down between the Democrats and Republicans in the Senate, Dodd wrote a bill which included an “independent” CFPA which would be housed in the Federal Reserve.

After going back and forth about whether to support the Dodd Bill, Corker said (out loud):

I don’t want an overzealous consumer protection agency. We need balance. Right now in the bill, there’s too much independence and too little coordination between the regulators and the consumer protection side.

So there it is.  Corker, and most likely, all Congressional Republicans do not want a CFPA to be too independent and too overzealous in its protection of consumers from financial products.  Because the less than zealous protection the FED, SEC, OCC and OTC did such a good job the past 5 years.

I am not saying that people should not be allowed to make bad decision regarding their finances.  I just think that some one should tell them what the terms of their mortgages and credit cards mean and what consequences will flow from their decisions.  It is no different from a doctor getting informed consent from their patient before performing surgery.  The doctor must give the patient all of the material information they need about the risks and rewards of the surgery.  But after that, it is up to the patient.  However, if the doctor fails to provide the patient with all of the relevant information and something goes wrong, they can be held liable for malpractice.  The doctor is required to give this information because he has all of the information and patient usually has none and cannot figure out what to do with that information even if they did have it (it is what lawyers and economists call an information asymmetry)  What has been lacking has been real disclosure of understandable information regarding financial transactions and arrangements.  Just look at your credit card agreements and see if they are decipherable.

And if some financial products turn out to hurt more consumers than they help, they should be banned.  As Professor Warrent asks, if we refuse to allow a toast on the market that continues to blow up when used, why shouldn’t we do the same for mortgages?

Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products – a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.

It is telling when Professor Warren wrote this article calling for a CFPA–Summer of 2007.  That was mere months before the entire credit market nearly imploded.


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