As Konczal correctly understands, the proposals to reform the CFPB while it is still in its cradle are quite obviously aimed at making it less effective. Many of the proposed reforms would introduce into the CFPB the very same weaknesses that hampered the effectiveness of the overseers of Fannie Mae and Freddie Mac.
Republicans, on the other hand, quite reasonably fear that a highly effective, centralized government agency focused on “consumer finance” could put a damper on economic growth by creating more red tape for banks and other lenders.
The entire debate over the CFPB is warped by the unstated assumption that this should all be handled by a centralized agency. The liberals want a muscular, independent centralized agency. The conservatives want an agency responsive to political checks and balances—which liberals rightly understand to mean “open to pressure from banking interests.”
But why should we assume that consumer finance protection needs to be centralized at all? Are the protections needed by South Dakota farmers the same as those needed by New York apartment renters or Florida retirees? Isn’t this exactly the sort of thing with which states should experiment? Wouldn’t a decentralized approach to consumer finance make a lot more sense?
The centralization of consumer finance protection is an outcropping of an outdated law that was intended to replace local banking with national banking. During the Civil War the Republicans passed the National Banking Act with the dual aim of raising money for the government—nationally chartered banks were required to buy federal government bonds—and make banking regulation more uniform.
This didn’t work as planned. The national charter did not perform the expected job of replacing state charters. In fact, we developed a dual system of charters, with many banks preferring to remain state-chartered.
In the couple of decades, however, the national bank charter has been used to hammer away at state-level regulation. The Office of Comptroller of the Currency, which has regulatory oversight for nationally chartered banks, resisted state attempts to rein in predatory lending. It still insists—on incredibly weak legal grounds—that its views of regulation should take precedence.
The CFPB was hatched largely as a reaction to the OCC’s abuses. If the OCC was going to insist that only a federal regulator could make rules for nationally chartered banks, then perhaps we should have a federal regulator dedicated to protecting consumers.
I’ve always feared that, regardless of the structure of the CFPB, it will eventually be captured by the banks. This might be harder to accomplish under the current structure—and easier under the Republican proposals—but it is inevitable. All it would take is a bank-friendly administration appointing a new head very sympathetic to the arguments of banks. We might even have that administration right now.
A more radical proposal would be to recognize that the national charter has outlived its purpose. Let’s abolish it altogether. The liberals can win an important battle for protecting consumers—by freeing the states to regulate banks operating in their jurisdictions—while moving to the right of Republicans on a states' rights issue.
So how about it, folks? Let’s push reset on this whole debate. And this time let’s push for a reform that would really make a difference.
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