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I have been incredibly critical of Geithner in the past, and reserve the right to do so: however, he's done nailed this topic.

Regarding the Consumer Financial Protection Agency the White House proposed to oversee a vast range of financial products: Geithner has backed and strongly advocated on behalf of taking the power away from the Fed whose primary interest is the financial health of the Banks providing these products and giving it to the proposed Commission.

"I think it's very hard to look at that system and say that it did anything close to an adequate job of what it was designed to do," Geithner told the House Financial Services Committee. He cited the collapse of the housing and credit markets because of high-risk subprime mortgages made to borrowers who didn't understand and couldn't afford them.

When addressing Fed Chairman Bernake's point that the Fed should hold the powers -

"With great respect to the chairman and other supervisors who are reluctant to do this, they are doing what they should, which is defend the traditional prerogatives of their agencies," Geithner said. "I think frankly all arguments should be viewed through that prism."

When Sheila Bair duly attempted to make the case for tasking current agencies with the powers Geithner made this point at Maloney's(NY) prodding-

When asked by Rep. Carolyn Maloney, D-N.Y. whether such an arrangement would work, Geithner said no, because enforcement would remain uncoordinated across the government.

And uncoordinated and disjointed is what helped this last mess to occur.  This isn't going to take any power from the FDIC, Fed or OCC to regulate banks: just their end products, which the Fed had the power to regulate but failed, and which the OCC blocked the states from even investigating.

The idea of the Commission is based on the model of the Consumer Product Safety Commission, which doesn't care about a company's campaign donations when it considers lead paint in toys. They don't care about a Fed Chair's legacy, a company's books, or it's pension plan, or it's OSHA infractions, or it's HR filings: all they care about is the end product and its danger to the consumer. If an item's dangerous, they recall it.

...The agency has the authority to develop uniform safety standards, order the recall of unsafe products, and ban products that pose unreasonable risks. In establishing the Commission, Congress recognized that  "the complexities of consumer products and the diverse nature and abilities of consumers using them frequently result in an inability of users to anticipate risks and to safeguard themselves adequately."

As a matter of act, if you insert

"the complexities of financial products and the perverse nature of institutions providing them"

you begin to see why such a commission is needed.  And it isn't just the infinitely insane inventions and evolutions of the industry that give pause. It's also the various physical and legal jurisdictions. For example, products aren't regulated based on what they are, so much as who provides them.

The subprime mortgage market provides a stunning example of the resulting fractured oversight. In 2005, for example, 23 percent of subprime mortgages were issued by regulated thrifts and banks. Another 25 percent were issued by bank holding companies, which were subject to different regulatory oversight through the federal system. But more than half–52 percent, to be exact–of all subprime mortgages originated with companies with no federal supervision at all,

As Elizabeth Warren points out, this results in 1. greater loopholes and 2. regulatory arbitrage - because an agency will be loathe to crack down when an entity can simply morph or move from its jurisdiction; reducing the potency; and therefore, the necessity of that agency.

Rep. Brad Miller D-NC quoted

the late Federal Reserve governor Ned Gramlich to make the case: "Why are the most risky products sold to the least sophisticated borrowers? The question answers itself, Gramlich said. The least sophisticated borrowers are probably duped into taking these products."

Credit card contracts that were 1 page long in 1980 are now over 30 pages.

In a recent memo aimed at bank executives, the vice president of the business consulting firm Booz Allen Hamilton observed that most bank products are "too complex for the average consumer to understand."

It's not going to interfere with any state laws, so long as the state laws are as strict or stricter than the commission's.  This will help people like those in California, who have an Attorney General whose sister is an executive for Goldman Sachs and sat on the Board of Countrywide.

Schumer has this to say -

The bill's merit, the New York Democrat said, is that it regulates the actual financial product rather than the company producing it.

"Disclosure is no longer enough," said Schumer. "Just as you wouldn't just have disclosure on drugs, you can't simply have disclosure on financial products. Consumers have been trapped in a business model that's designed to induce mistakes and jack up fees."

Now if these folks will walk the walk, we may be back in business. Sound business.

Originally posted to JerichoJ8 on Tue Jul 28, 2009 at 09:24 PM PDT.

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Comment Preferences

  •  I would not have Geithner's job if they paid (7+ / 0-)

    me a million bucks.

    http://politicz.wordpress.com/

    by GlowNZ on Tue Jul 28, 2009 at 09:27:38 PM PDT

  •  One minor detail is that the current plan (2+ / 0-)
    Recommended by:
    RonV, yoduuuh do or do not

    doesn't regulate, it simply watches.  They are arguing about enabling legislation, enabling somebody to do some regulating at some future date if that somebody feels like and gets around to it.  The whole thing is actually a toothless exercise in grinning our problems away.

    "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

    by enhydra lutris on Tue Jul 28, 2009 at 09:28:20 PM PDT

    •  Is that the president's plan or congress'? (0+ / 0-)

      I like my Blue to be dark and deep.

      by JerichoJ8 on Tue Jul 28, 2009 at 09:29:53 PM PDT

      [ Parent ]

      •  Both, as near as I can tell. (1+ / 0-)
        Recommended by:
        RonV

        "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

        by enhydra lutris on Tue Jul 28, 2009 at 09:39:38 PM PDT

        [ Parent ]

        •  From the House Bill - (2+ / 0-)
          Recommended by:
          Pluto, snaglepuss

          SEC. 137. DUTIES.

          (a) In General-

          (1) REGULATIONS ENSURING FAIR DEALING WITH CONSUMERS- The Agency shall prescribe regulations imposing duties on a covered person, or an employee of a covered person, or an agent or independent contractor for a covered person, who deals or communicates directly with consumers in the provision of a consumer financial product or service, as the Agency deems appropriate or necessary to ensure fair dealing with consumers.

          (2) CONSIDERATIONS FOR DUTIES- In prescribing such regulations, the Agency shall consider whether--

          (A) the covered person, employee, agent, or independent contractor represents implicitly or explicitly that the person, employee, agent, or contractor is acting in the interest of the consumer with respect to any aspect of the transaction;

          (B) the covered person, employee, agent, or independent contractor provides the consumer with advice with respect to any aspect of the transaction;

          (C) the consumer’s reliance on any advice from the covered person, employee, agent, or independent contractor would be reasonable and justifiable under the circumstances;

          (D) the benefits to consumers of imposing a particular duty would outweigh the costs; and

          (E) any other factors as the Agency considers appropriate.

          (3) DUTIES RELATING TO COMPENSATION PRACTICES- The Agency may prescribe regulations establishing duties regarding compensation practices applicable to a covered person, employee, agent, or independent contractor who deals or communicates directly with a consumer in the provision of a consumer financial product or service for the purpose of promoting fair dealing with consumers. The Agency shall not prescribe a limit on the total dollar amount of compensation paid to any person.

          I like my Blue to be dark and deep.

          by JerichoJ8 on Tue Jul 28, 2009 at 09:44:25 PM PDT

          [ Parent ]

          •  Yep, that is enabling language, it, in itself, (2+ / 0-)
            Recommended by:
            RonV, CMYK

            does not legislate concerning or regulate in any way behavior, activity, products, etc.  It simply authorizes somebody else to do so if and when they see fit.  There are some Code sections in the tax code enabling regulations for which one have been issues even though many decades have passed.

            "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

            by enhydra lutris on Tue Jul 28, 2009 at 09:48:14 PM PDT

            [ Parent ]

            •  It doesn't prevent States from going after banks (0+ / 0-)

              or products. Commission is guided by a directive -

              Requires the Agency to seek to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services. Authorizes the Agency to take administrative actions to: (1) prevent a person from committing or engaging in an unfair, deceptive, or abusive act or practice under federal law in connection with any transaction with a consumer for a product or service; (2) ensure the appropriate and effective disclosure or communication to consumers of associated costs, benefits, and risks; (3) guide the manner, settings, and circumstances for the provision of products or services to ensure that their risks, costs, and benefits are fully and accurately represented to consumers; and (4) approve pilot disclosures to consumers.

              I like my Blue to be dark and deep.

              by JerichoJ8 on Tue Jul 28, 2009 at 09:54:21 PM PDT

              [ Parent ]

    •  I believe they'll be able to remove products (0+ / 0-)

      from the marketplace.

      I like my Blue to be dark and deep.

      by JerichoJ8 on Tue Jul 28, 2009 at 09:36:41 PM PDT

      [ Parent ]

      •  Oh, they will have the power to regulate, but it (0+ / 0-)

        is optional.  Here's what I'm trying to get at -  compare:

        real regulation - Nobody shall drive in a residential area at a speed in excess of 25 miles per hour.  Violations are subject to fines of up to $x for first offense, $y for second offense ... .

        Enabling act - There shall be formed a committee called the traffic regulation enabling committee which shall study traffic and the potential need for regulating it and which shall be authorized, should it determine that a need exists, to issue regulations (subject to notice, public coment and the like) concerning said traffic.

        "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

        by enhydra lutris on Tue Jul 28, 2009 at 09:44:54 PM PDT

        [ Parent ]

        •  Not the best analogy - A speed limit is a much (0+ / 0-)

          more controllable factor. The banks are creating crap out of thin air that requires a flexible approach and gives the Congress cover from having to do it themselves. Theoretically the commission should move quicker.

          I like my Blue to be dark and deep.

          by JerichoJ8 on Tue Jul 28, 2009 at 09:49:52 PM PDT

          [ Parent ]

        •  Perhaps a closer analogy. (1+ / 0-)
          Recommended by:
          Pluto

          Think of tobacco.  During the 16th century it was divorced from traditional, ritual and (most importantly) rare use.  People with money began to smoke the stuff regularly, but syphilis, civil upheaval, plagues, famines, spoiled food, gangrene and the medical care of the day would usually dispatch a person well before the onset of lung cancer or coronary disease.  

          Then syphilis mutated, most of Europe developed stable governance, the bubonic plague and its siblings completed their two centuries' work, a smallpox vaccine was (re)developed, scientific farming was introduced and the harvests were preserved and later refrigerated, hospitals were given a good scrubbing and physicians were required to read, write, cipher and wash up.  This, tobacco addicts escaped "heated miliary fever" and sweating sickness, just to be felled by lung cancer while those who abstained from tobacco continued to live.  The first verifiable hints of tobacco's tendency to kill its users emerged.

          Over the strenuous and unprincipled opposition of the tobacco industry, tobacco is now tightly regulated and taxed in most democracies.  In theory, other substances meant for human consumption without a long history of safe human consumption must undergo animal and human trials before their release.  

          Some substances are not necessarily evil.  Moderate consumption of alcoholic beverages may be healthful.  Indiscriminate consumption of alcoholic beverages before driving is not.  Thus the first is ignored or smiled upon while the second is forbidden.  

          Subprime mortgages show properties like those of alcohol and tobacco.  A subprime mortgage carefully drawn and administered helps the working poor avoid spiraling rents and offers decent returns to the lender.  A bad subprime mortgage is harmless if killed off before it turns seven if house prices are rising.  A bad subprime mortgage allowed to turn seven and reset is cancer for the economy.

          Surface conditions changed in 2007 and 2008.  We think that the triggers of last fall's meltdown were unalloyed evils;  our juniors may rejoice in being able to afford a house and our great-grandchildren may see $140 oil as the herald of the green economy.  Similarly, variolation was "superstitious, heathen, ungodly" and moralists of the age must have been horrified at the sight of children undergoing a "barbaric ritual" the slaves brought from Africa.  Anesthesia was Man staying God's justice.  Eating vegetables every day meant you were poor, and boiling them less than two hours was just plain shiftless.

          To finish belaboring the medical point, no regulation is a specific against all future frauds.  Regulation is, by its nature, reactive;  excessively proactive regulation like Prohibition often carries bad side effects.  Many years passed between the development of LSD and its prohibition, and connoisseurs of altered states are continually searching for a high that has not yet been banned.  Geithner's plan is a good start, but there will be no end.  

          2009: Year of the Donkey. Let's not screw it up.

          by Yamaneko2 on Wed Jul 29, 2009 at 12:25:53 AM PDT

          [ Parent ]

        •  You missed. (3+ / 0-)
          Recommended by:
          Pluto, snaglepuss, JerichoJ8

          These are the steps:
          1.

          Enabling act - There shall be formed a committee called the traffic regulation enabling committee which shall study traffic and the potential need for regulating it and which shall be authorized, should it determine that a need exists, to issue regulations (subject to notice, public coment and the like) concerning said traffic.

          2.

          real regulation - Nobody shall drive in a residential area at a speed in excess of 25 miles per hour.  Violations are subject to fines of up to $x for first offense, $y for second offense ... .

          The committee called "Traffic Regulation" or whatever they call it in your area determined that a need existed....THEN they put up the traffic signs and hired some cops to enforce them.

          These aren't opposite actions.

          As if we could make things better without making them worse.

          by A Voice on Wed Jul 29, 2009 at 02:24:32 AM PDT

          [ Parent ]

          •  Never said there were opposite actions. (0+ / 0-)

            The traffic regulation committee, of course, waited 15 years, until 7 fatal accidents and hundreds of non-fatal ones.  The point is that the legislature can proscribe and prescribe, thereby regulating an industry, or it can pass enabling acts, enabling somebody else to eventually regulate or not, as they see fit.  Such an act does not, upon passage, regulate anything, it merely attempts to shift the legislative authority and burden elsewhere.

            "Fascism should more properly be called corporatism because it is the merger of state and corporate power." -- Benito Mussolini

            by enhydra lutris on Wed Jul 29, 2009 at 12:13:38 PM PDT

            [ Parent ]

  •  The Fed: a perfect example of regulatory capture, (2+ / 0-)
    Recommended by:
    shenderson, JerichoJ8

    made easy by the fact that regulated entites' former (and sometimes, illegally, current) employees run it.
    It will be easy to see if this is actually intended to be effective at consumer protection - see who are the top people appointed to it.

    •  as I stated above, I believe the fact that it (0+ / 0-)

      won't be allowed to preempt stronger state laws is a strong indicator of the strength of the bill and its intent. Also, it removes all of the powers to block actions that the Fed and others held. At worst, the commission may find itself being sued to do the right thing should a nimrod be placed at the head.

      I like my Blue to be dark and deep.

      by JerichoJ8 on Tue Jul 28, 2009 at 11:38:59 PM PDT

      [ Parent ]

  •  yeah, the CFPA might actually happen (3+ / 0-)
    Recommended by:
    Pluto, snaglepuss, JerichoJ8

    **keeping fingers crossed**

  •  At some point in the future (0+ / 0-)

    Geithner will get the credit he deserve. He's a hero to take this job and he's doing a very good job.

    "He wanted to know if i can get the press off his lawn. I told him that i can't get the press off MY lawn" - Barack Obama.

    by blackwaterdog on Wed Jul 29, 2009 at 03:00:50 AM PDT

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