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Wednesday, October 21, 2009
The CFPA and the Case for Conglomerate Regulators
I’ve
been watching the twists-and-turns of the debate over the proposed Consumer
Financial Protection Agency (CFPA) with a great deal of interest. One
reason this fight has been so fun to watch is the prominence of law profs on
both sides of the debate. The idea was developed by Elizabeth Warren, and has found a
great deal of support from scholars like Oren Bar-Gill, John Pottow, Adam Levitin and others, while arguments on
the other side have come from William Kovacic and my colleagues Todd Zywicki and Josh Wright, among others.
(Those links are to articles and posts, but if you prefer your debates in video form,
here’s Warren and here’s Zywicki.)
I’m know very little about consumer
finance, and, as such, have nothing to add to the very sophisticated debate
about whether and how to regulate consumer financial products like credit
cards, mortgages and the like. But there is one part of the debate that
has been bugging me and I’d be curious to hear your thoughts on it. The
proposal has gone through various iterations in Congress and surely will be
modified further as it proceeds through the legislative process. However,
one piece of the proposal has been constant: CFPA is supposed to be independent from existing regulatory bodies. After all, one of the major arguments for the
CFPA is that it will be independent from bank regulators concerned with
the safety and soundness of financial institutions, because those regulators
are not primarily concerned with consumers and face conflicts of
interest. Critics view this as a problem, suggesting that an empowered
CFPA would not consider the effect of its regulations on the banking
industry. Whatever your view on this, independence carries others
costs. An independent CFPA carries the risk of regulatory capture for
simple Mancur-Olson-style reasons. As Warren points out in her analysis of the
difficulty of getting the CFPA passed, banks are highly interested parties on
whom regulation stands to create concentrated harms and consumers, the intended
beneficiaries of the regulations, always will be a diffuse group who have
little individual incentive to lobby future Presidents about future
appointments. Is there much doubt that banks or credit card issuers
would try to influence who the President will appoint to the CFPA if it is
created?
Now, there are public choice
concerns about almost all new governmental proposals, and should not be seen as
a reason not to have any consumer protections. But the part of the debate
I don’t get is why combining the CFPA with bank regulators or making it
independent are seen as the only choices. The CFPA could be
combined with another agency, one that has nothing to do with banks, and given the same powers, but with less worry
about capture because the lobbyists for the credit card companies would be matched by lobbyists
for other organizations.
The CFPA is modeled on the Consumer
Products Safety Commission (CPSC). If having a CFPA is a good idea,
why not give the CPSC the powers responsibilities of the proposed CFPA? Banks
would compete with manufacturers of consumer products (and consumer groups) over
appointments. Each group is likely to win on some of the appointments,
and this will reduce group polarization and extreme results by introducing
commissioners who were pushed for by different constituencies (and hence are
likely relatively neutral on the other things the commission does).
This is a conglomerate model for
regulators. For a little more discussion and the best ever conglomerate
regulation proposal, see below the jump.
This proposal is subject to the most common criticism of conglomerates – that single-focus agencies can specialize and get better at their jobs. I am unimpressed by this argument in this case, though. A conglomerate CPSC/CFPA would still have a huge staff focusing on specifically on consumer finance issues, and over time the commissioners would develop expertise. It’s not like the members of the CPSC know a great deal about all consumer products. The current head of the CPSC is Inez Tannenbaum, who was the South Carolina's State Superintendent of Education, which I suspect did not give her much experience assessing toaster design. These are political appointments and we need to worry about their political allegiances when engaging in institutional design.
The best conglomerate regulator
proposal I’ve ever heard was laughed out of Congress. Sen. Arlen Specter
proposed putting all appellate immigration cases into the Federal
Circuit. Critics – ranging from Richard Posner to Dick Durbin -- argued that patents had nothing to do with immigration. Exactly! The
lobbyists for and against immigration would push for appointments against the
lobbyists for against patent protection. This would lead to moderation in
opinions. All the while, the circuit would develop expertise over time
and would issue consistent rulings.
If we are going to have a CFPA, we
should try to reduce the chances that it
will end up being a forum for one bank to harm its competitors.
Maybe this is the time for conglomerate regulators.
Posted by David Schleicher on October 21, 2009 at 03:12 PM | Permalink
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