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.