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by Zach Carter, TMC MediaWire Blogger  

President Barack Obama rolled out his plan to overhaul financial regulation last week. While much of the Obama plan relies on the same regulators and structures that led to the current meltdown, there is one key exception. The establishment of an independent Consumer Financial Protection Agency would give ordinary citizens a seat at the financial policy table for the first time and prevent the abuses in credit card and mortgage lending that have wreaked havoc on households all over the country.  

The new agency is the brainchild of Harvard University Law School Professor Elizabeth Warren. As chair of a key oversight panel for the Treasury Department's bank bailout program, Warren has uncovered major deficiencies in the government's handling of the plan, including nearly $80 billion in overpayments to bailed-out banks. American News Project features footage of an interview with Warren, who explains why we need a separate agency to regulate on behalf of consumers.  


 Several bank regulatory agencies, the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision are already charged with writing and enforcing consumer protection rules for credit cards and mortgages, but have generally abandoned these duties to act as cheerleaders for their banks.The current structure's problems are two-fold. First, the current regulators are funded by fees levied on the very banks they regulate. When there are several different bank regulators, regulators compete to offer the weakest oversight and attract more banks, and, in turn, more funding. The process quickly becomes a race to the bottom. When the subprime mortgage boom was surging in 2003, the OCC, a federal bank regulator, went to court to ensure that the state of Georgia's tough predatory lending laws could not be enforced.  

Second, the regulatory agencies tend to look at the health of the bank, rather than the quality of the loans it makes. If a commercial bank like Citigroup makes a really outrageous predatory loan, then sells that loan to an unregulated investment bank like Goldman Sachs, Citi's regulator doesn't particularly care. A new regulatory agency that answers exclusively to consumers rather than banks would be a very meaningful change for the financial system.  

The rest of the overhaul is a little frightening. As William Greider explains for The Nation, instead of crafting explicit rules to curb obvious abuses, Obama's plan relies very heavily on ceding power to the Federal Reserve. Under the new framework, the Fed would both oversee "systemic risk" in the financial architecture and regulate the banks that have become "too big to fail." This, Greider emphasizes, is a very bad idea. The Fed has repeatedly proven itself to be uninterested in regulating banks. Citi needed $45 billion in direct cash infusions from the U.S. taxpayer and hundreds of billions of dollars in other guarantees to stay afloat, as Nomi Prins writes for Mother Jones. Who was charged with regulating the company and making sure such an outrage never occurred? The Fed.  

In a video spot for GritTV, former senior banking regulator William Black argues that it makes little sense to allow banks to become too big to fail at all. Sturdier regulations are better than nothing, but the real solution is to break them up. "Why would we allow banks to be so big that they threaten the global economy?" Black asks.  


 Going back to Prins in Mother Jones: Elsewhere, the regulatory revamp is simply too vague to be helpful. Regarding derivatives—the financial weapons of mass destruction that destroyed AIG—it's not clear if Obama wants to regulate the entire industry, or a small, meaningless fraction. Obama's plan is to require that "standardized" derivatives are traded on exchanges and allow "customized" derivatives to escape investor scrutiny. But the Treasury never explains what the difference is between these "standard" and "custom" products, or how it will make sure banks don't game the system.  

Lest we forget, this crazy finance system brought us the worst economic calamity since the Great Depression. The unemployment rate, by conservative measures, is at 9.4% and rising. You may have noticed the stories about "green shoots" signaling the first inklings of economic recovery circulating through the media. But these signs are only promising, AlterNet's Joshua Holland explains, if you take them completely out of context and ignore all of the other terrible news. The economy is in great shape ... except for the millions of foreclosures that will take place this year, the skyrocketing unemployment rate, the decimated retirement funds, and the mountains of credit card debt weighing down the average U.S. consumer.  

Serious consumer protections are nothing to scoff at, especially after watching an outbreak of predatory mortgage lending spawn an economic collapse. It comes as no surprise then, as Tim Fernholz notes for The American Prospect, that the bank lobby is already working to water down the new consumer protection agency's powers. But even if a regulator for consumers makes the final legislative cut, with so many drastic problems in the current financial regulatory structure, the Obama plan simply does not do what is necessary to fend off another crisis.  

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Originally posted to The Media Consortium on Tue Jun 23, 2009 at 06:17 AM PDT.

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Comment Preferences

  •  I agree (2+ / 0-)
    Recommended by:
    Words In Action, HenryBurlingame

    We're putting the fed (fox) in charge of compliance and oversight (henhouse) ... and there's no re-instatement of regulations like Glass Steagall, so we'll be bailing out gambler banks forever. Goldman Sachs recently became "a bank." It's the quickest way to rob the average citizen these days.

    Weak tea, this proposed new "oversight." I am not at all impressed.

  •  Interestingly, despite so much focus on other (2+ / 0-)
    Recommended by:
    JuliaAnn, HenryBurlingame

    issues, Obama's success in this single area (regulation of corporations and the financial services sector) may well have the most serious impact on the future of the nation and Obama's legacy, as it, along with election reform, is the most direct way to deal with the concentration of wealth and power that undermines, among other things, the government's ability to act on behalf of the public good.

    They tortured people to get false confessions to fraudulently justify their fraudulent invasion of Iraq.

    by Words In Action on Tue Jun 23, 2009 at 06:24:54 AM PDT

  •  Many good ideas in that diary, (2+ / 0-)
    Recommended by:
    JuliaAnn, MKSinSA

    and one understatement,

    Serious consumer protections are nothing to scoff at

    "Neither a borrower nor a lender be"

    by HenryBurlingame on Tue Jun 23, 2009 at 06:29:44 AM PDT

  •  I'll be skeptical of the Consumer Fin. Prod. (1+ / 0-)
    Recommended by:

    Agency until details come out.  It's easy to say we'll protect people, but in practice it gets messy and tough to do.  As an example, take these two purported goals of the Agency:

    The agency would eliminate small print, gotcha clauses and legalistic gobblegook

    Mandate more disclosure and provide information about costs, penalties and risks so consumers have a "clear disclosure regarding the consequences of their financial decisions."

    So, get rid of small print on the one hand and add more small print on the other.  

    The other goals seem underwhelming to me.  It could be done in good fashion, but it could also wind up being a useless bureaucracy that no one pays attention to.  

    We are building a team that is continuously being built. - Sarah Palin

    by burrow owl on Tue Jun 23, 2009 at 06:44:26 AM PDT

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