Baseline Scenario

The Baseline Scenario
CFPA and Non-Banks
Posted: 07 Sep 2009 07:51 AM PDT
Elizabeth Warren has a new op-ed at New Deal 2.0 arguing for, surprise, the Consumer Financial Protection Agency, but this time with a different emphasis – non-bank lenders.
The opponents of the CFPA – not only banks, but the head of just about every current financial regulatory agency – argue that consumer protection should be combined with prudential regulation, so that one agency should be both making sure that a bank doesn’t collapse and that it isn’t abusing its customers. Many people have pointed out the flaws with this argument: first, consumer protection invariably slips down on the priority list; second, regulators become hesitant to crack down on abusive practices because those abusive practices generate the profits that make the bank “healthy” to begin with.
In addition, this combination makes the fundamental mistake of regulating financial institutions rather than financial functions, and therefore lets abusive practices simply escape to unregulated institutions. Banking regulation in the U.S. has historically been focused on making sure that banks don’t collapse, so depositors can get their money back (without bankrupting the FDIC). The result was that non-bank mortgage lenders and consumer finance companies were notoriously under-regulated. This created another opportunity for regulatory arbitrage: as Warren writes, “the Center for Public Integrity found that 21 of the 25 largest subprime issuers leading up to the crisis were financed by large banks.” In other words, banks outsourced their abusive practices to unregulated entities that they financed. How can that be a good thing?
The CFPA is many things, but it is also an example of regulating a financial function rather than a financial institution, and therefore makes regulatory arbitrage that much harder; to get outside its reach, you have to define the thing you are doing as not a financial service. (Although I think it has a weird exception for insurance products, which could turn out to be a big problem.) Since regulatory arbitrage seems to have been a core business strategy of many financial institutions over the last decade, that seems to be a good place to start.
By James Kwak

Consumer Protection Redux: The Lessons of History
Posted: 07 Sep 2009 07:22 AM PDT
For your Labor Day reading enjoyment, we bring you this guest post by Lawrence B. Glickman, who teaches history at the University of South Carolina and is the author of Buying Power: A History of Consumer Activism in America.
“We’re proposing a new and powerful agency charged with just one job: looking out for ordinary consumers,” said the president on June 17th. The centerpiece of his proposed overhaul of the nation’s financial system, the Consumer Financial Protection Agency (CFPA), is designed to end what the president called “failure of…government to provide adequate oversight” by monitoring banking transactions, including mortgages, credit cards and checking and savings accounts. It did not take long for the predictable critics to denounce the agency with predictable rhetoric. “It’s bad for the consumers,” said Steve Bartlett, president of the Financial Services Roundtable, a lobbying group for banks. The institution will add “yet another regulatory layer” while advancing “the agenda of activist special interests,” according to the U.S. Chamber of Commerce. The new agency represents “an unprecedented grant of power to mandate business practices” claims the American Bankers Association.
This is the language of conservative populism, a mainstay of the Republican party from Ronald Reagan to Newt Gingrich to Karl Rove. Conservative populism, wrote Jonathan Chait in the New Republic last year, “dismisses any inference that the rich and the non-rich might have opposing interests” and defines elites in cultural rather than economic terms as “intellectuals and other snobs who fancy themselves better than average Americans.” Several decades of repetition have made this rhetoric familiar: federal efforts to help ordinary people–consumers–will inevitably hurt them; government is the problem rather than the solution; bureaucracy is “bumbling” (to use the words of a Crain’s New York Business poll about the proposed Agency); federal agencies designed to serve the public good actually serve narrow special interests. It has been, in no small measure, through the ready deployment of this language that the Republicans have positioned themselves as simultaneously the party of big business and working Americans while denouncing Democrats as representing both intrusive government and elitism. This meme has been devastating for liberals since any expansion of government services can be dismissed with a quip–Bureaucrat!, Red Tape!, Nanny State!– rather than an argument. Recently, for example, Senator Lindsay Graham said that the American people would never tolerate the public choice option in health insurance because “you’ve got a bureaucrat standing in between the patient and the doctor.” For similar reasons, Senator Kit Bond dismissed the CFPA proposal as a “bad idea.”
To understand how Republicans have married free market homilies with the anti-elitist sympathies of ordinary Americans we must look back even before Reaganism to the 1960s and 1970s when policies favoring big business were first dressed up in the language of sympathy with ordinary folks. One of the first successful efforts in this idiom was the battle against an earlier consumer protection proposal. From 1969 to 1978 efforts to enact a Consumer Protection Agency (CPA) came tantalizingly close to passage in Congress. With its leader appointed by the president, the CPA was to represent the consumer interest before federal agencies and courts and to serve as a clearinghouse for consumer complaints. The CPA had widespread popular support and seemingly overwhelming Congressional support: the Senate passed a CPA bill 74-4 in the 91st Congress (1969-1971); the House passed a similar bill 344-14 in the 92nd Congress; and in the 94th Congress both the House and Senate passed the bill but without a big enough margin to overcome an expected veto from President Gerald Ford. Yet the CPA ran into a buzzsaw of lobbying and never became law. This fight against protection sheds light on the rise of a style of conservatism that continues to veil itself as populism today.
Obama’s efforts to reignite consumer protection suits the current historical moment in which for the first time in two generations reflexive antiliberalism appears to have lost its rhetorical punch. Passing consumer protection legislation may well be a way to advance and modernize the stalled and seemingly moribund liberal project. Although President Obama stresses the twenty-first century nature of his proposals, the architect of the CFPA, the Harvard Law Professor Elizabeth Warren draws explicitly on the unfinished agenda of the earlier campaign for consumer protection. Her 2007 article that first proposed the agency was entitled, “Unsafe at any Rate.” Not only did she take her title from Ralph Nader’s 1965 blockbuster, Unsafe at any Speed, Warren noted that the model for “such safety regulation is the U.S. Consumer Product Safety Commission,” the product of many consumer-friendly laws passed between the mid 1960s and mid-1970s. Safe appliances came under the government’s mandate in the 1960s, Warren notes, and incorporating financial services fulfills the goals of consumer protection by expanding it to the less tangible but equally important category of family finances.
The lessons from past consumer battles are not only ideological but organizational. Unwilling to be out-lobbied again, a coalition of 200 consumer groups has created Americans for Financial Reform, which will aim to influence Congress and vows to respond vigorously to the opponents talking points. President Obama has also indicated his willingness to take the offensive. “The American people sent me to Washington to stand up for their interests,” he said in his weekly radio address on June 20th. “And while I’m not spoiling for a fight, I’m ready for one.”
Such a fighting attitude may well be necessary if the earlier consumer protection battle is any indicator. In the first fight against CPA legislation, conservative business leaders, lobbyists, and politicians successfully took aim at liberalism by first taking on the consumer movement. With a well-financed and well-coordinated campaign facilitated by an informal consortium of lobbyists called the Consumer Issues Working Group, CPA opponents described consumer protection as exemplifying the flaws of American liberalism and as standing in for the twentieth-century liberal project as a whole.
The revived consumer movement of the 1960s and 1970s was central to what the political scientist Jeffrey Berry has called “postmaterial liberalism,” a politics concerned not just with economic growth but with improving the quality of life. “For half a century we called upon unbounded invention and untiring industry to create an order of plenty for all of our people,” as president Lyndon Johnson said in his “Great Society” speech in 1965, which exemplified this postmaterial view. “The challenge of the next half century is whether we have the wisdom to use that wealth to enrich and elevate our national life, and to advance the quality of our American civilization.” Consumer protection was to Johnson and many others central to that mission, and a variety of popular laws, including “truth in lending” and “truth in packaging” were enacted. in his administration and in the Nixon presidency that followed it . Consumers Union doubled in membership between 1966 and 1972 as it joined the battle against pollution and suburban sprawl to its mission of scientific product testing. Presidents of both parties from John F. Kennedy–who declared a “Consumers’ Bill of Rights” in 1962–to Johnson–who appointed a White House advisor on Consumer Affairs in 1964–recognized the political salience of appearing pro-consumer, to Nixon and Ford who also appointed consumer affairs deputies. The high point came in Jimmy Carter’s campaign for the presidency in 1976 when he told an audience that he hoped to rival Ralph Nader “for the title of top consumer advocate in the country.” (It may be hard to recall today, in the wake of Nader’s unpopular actions in the 2000 election and beyond but throughout the 1960s and 1970s he consistently ranked as one of the most admired Americas. When Carter wooed Nader to meet him in Plains it was seen as a coup for Carter’s effort to establish his liberal bona fides.)5 Between 1969 and the late 1970s consumer activists, notably Nader, and many Congressional leaders of both parties, including the Republicans Jacob Javits and Charles Percy, put their weight behind the plan for a federal agency to protect and promote consumer interests. In 1973 the New York Times conveyed the conventional wisdom when it declared that “there is in the air the possibility that consumerism will become a mass movement of untold economic and political power.” The CPA seemed the minimum achievable goal of that movement.
From its beginnings, however, the revived consumer movement alarmed opponents. As early as 1964, the advertising trade journal, Printers Ink called it an “ominous phenomenon.” By 1967, the consumer affairs reporter Sidney Margolius noted that the “business backlash has been unusually sharp and surprisingly effective.” Ever since the consumer movement began in the 1930s, business groups organized to weaken its power, creating counter-organizations, attacking the motives and personnel of consumer groups, and predicting the terrible consequences of consumer protection. With the popularization of the consumer movement in the 1960s, business groups once again organized, and they shifted into high gear in 1969 when Benjamin Rosenthal (D-NY) sponsored legislation for the CPA.
Several key organizations played an especially prominent role in opposing consumer legislation, notably the U.S. Chamber of Commerce, the Business Roundtable, the Grocery Manufactures Association, the National Association of Manufacturers, and the American Enterprise Institute. These groups carried out what the veteran Congressional leader and future Speaker of the House Tip O’Neill called the most “extensive lobbying” he had witnessed in his quarter of a century in Washington. The anti-CPA lobby’s biggest success came in the promotion of a series of talking points which, in sum, amounted to a repudiation of American liberalism, and became familiar aspects of conservative discourse. Outspending complacent pro-CPA forces by a huge margin, they ensured that their message would be heard through a series of press releases (often published verbatim in small-town newspapers throughout the country) and advertisements (“The Last Thing Consumers Need is Another Government Agency,” declared a full-page ad paid for the by US Chamber of Commerce in the New York Times in 1977. )
Although the proposed agency was relatively modest with an initial budget of $15 million/year, opponents depicted it as exemplifying a new and dangerous bureaucracy favored by overzealous liberals. According to critics, the authorization of a consumer protection agency would result in “big government,” a symptom of which was “red tape and lawyers,” as well as “onerous” and “mind-numbing” regulations. The CPA bill would lead to “immense harassment of employers,” concluded the Nation’s Business, published by the U.S. Chamber of Commerce. But the opponents went further than merely condemning the excessive paperwork the CPA might generate. It represented a “bureaucratic nightmare,” according to James J. Kilpatrick who was one of many syndicated columnists–among them, Patrick Buchanan, William F. Buckley and George Will–to criticize the CPA in his columns, because the CPA was authorized with inappropriate and excessive powers, which would turn it into a “meddlesome” and “out of control” body, a “superagency,” even a “monster superagency.” Critics agreed that the CPA would hold what they variously framed as “irresponsible power,” “unbridled power,” “absolute power,” and “enormous power.” The CPA would produce a group of potentially “despotic” and dangerous “super snoops.” According to the US Chamber of Commerce, the CPA bill marked “the most serious threat to free enterprise and orderly government ever to be proposed in Congress.”
The flip-side of bureaucratic arrogance and over-reach, according to the critics of the consumer movement, was the assumption of incompetence on the part of ordinary consumers. The very call for an agency on behalf of consumers was an expression of the bureaucrats’ lack of faith in the abilities of their countrymen and women. Ronald Reagan, the ex-Governor of California, criticized the consumerists–whom he compared to Orwell’s “Big Brother,” in several op-ed pieces and radio commentaries in 1975–for “promoting the notion that people are too dumb to buy a box of corn flakes without being cheated.” Reagan concluded that “professional consumerists are, in reality, elitists who think they know better than you do what’s good for you.” A group of Senators who opposed the CPA also rejected the view, which they claimed was implicit in CPA legislation, “that all consumers are mental midgets who must look to Washington to find out how to manage their personal lives from some bureaucratic consumer `representative’ who will have neither the time nor the knowledge to shop for and cook a decent supper.” According to the advertising executive, Arthur Fatt, the consumer movement sees “the typical consumer as a moron.” The celebration of the intelligence of ordinary Americans became a component of conservative anti-elitism and an element of its populism. If consumer advocates were snobs condescending toward those they claimed to protect, it was easy to dismiss their proposal as tainted since, as the business journalist Mary Bennett Peterson wrote, “those the Movement is designed to protect can actually wind up as its victims.”
In time such dismissals of liberal proposals became rote but in the 1970s this was a new line of criticism, one that successfully consolidated conservative ideology. As the CPA bill languished after its final defeat in 1978, conservative groups correctly foresaw the opportunity for what Jeffrey H. Joseph, of the U.S. Chamber of Commerce called a political and legislative “bonanza.” And indeed the terms of that victory foreshadow the rhetorical (and electoral) victories of Reaganism and the concomitant delegitimation of liberalism. The Wall Street Journal did not exaggerate when it noted that the CPA bill was “killed by words” and those words continued to resonate long after the once-popular federal consumer protection idea faded from public memory.
In recent years the hold of this ideology has weakened, creating space for a renewal of liberal politics, such as that represented by the renewed call for consumer protection after a thirty year hiatus. But this is no time for complacency. As Travis Plunkett, the legislative director of the Consumer Federation of America has observed, “the financial industry is sharpening its knives” against the CFPA idea. Yet although the old rhetoric has been revived–regulation is always strangling, bureaucracy remains dangerous, and the free market is inevitably the friend of the little guy–opponents have gone out of their way to acknowledge the problems and to agree that some regulation might be in order. Even though the Chamber of Commerce has recently launched a multi-million dollar defense of the free enterprise system, Tom Donohue, its president, has acknowledged that economic realities “certainly justified some out-of-the-ordinary remedial actions by government.” According to the Huffington Post, one opponent said, “Opposing a consumer protection agency sounds really terrible, no matter how you try to spin it.” This cautious response suggests in part the moderate nature of Obama’s proposal but also the exhaustion of the anti-liberal rhetoric which has sustained the Republic Party for the last forty years. It also provides an opportunity to make consumer protection once again a linchpin of modern liberalism.
By Lawrence Glickman








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