Big Finance vs. Consumer Protection: Partisan Politics Sheds Some Light

By Simon Johnson

The debate over re-regulation of the financial sector has finally, and irreversibly, turned partisan. This helps define issues in ways that may be more familiar and thus easier to understand.

In the blue corner we have Treasury Secretary Tim Geithner. Secretary Geithner’s overall banking policy continues to be problematic, and his broader re-regulation effort is hampered by all the free passes he gave to bank CEOs earlier this year. But on consumer protection he has the right message and he delivered it forcefully to Congress last week: We need a Consumer Financial Protection Agency (CFPA) and we need it now.

In the red corner, Representative Jeb Hensarling is rapidly emerging as a leader. A member of the Congressional Oversight Panel and the senior Republican on the House Financial Services subcommittee on Financial Institutions and Consumer Credit, he wrote last week in the Washington Times that the CFPA is “Orwellian”, because it would strip consumers of their rightful choices.

Mr. Hensarling seems dangerously close to slipping into double think.

He says that the House Republican “regulatory reform plan” will protect consumers. (This plan was not available for outside review when I enquired last week; if you have a copy that can be shared, please send it to me.) As far as I can see from his article – confirmed by what I heard before the House Financial Services Committee last week - the only tools they propose are those that have been tried and failed, repeatedly, in the recent past.

The key sentence in his op ed may be, “If we act responsibly, whether the mortgage blows up on us is largely within our control.” This ignores all the evidence that consumers were duped, misled, or otherwise fooled into financial products that they did not understand and could not afford.

Mr. Hensarling says that financial products are completely different from toasters, which are regulated by the Consumer Product Safety Commission, because “No one wants a toaster that will blow up, and whether it does is largely out of our control.” But regulation over consumer durables was introduced and tightened over the years precisely because the “free market” produced items that were unsafe (at any speed, or any toaster setting).

Mr. Hensarling claims that consumer protection will be very much against the interest of smaller companies. There is no evidence to support this assertion – and it seems implausible. Many smaller businesses have been scammed by Big Finance in the past few years – either directly, through the products they were sold, or indirectly, through the higher tax bill we all face as a result of bailing out the big banks.

And the bad behavior of big banks is closely connected to how the financial sector has been allowed – and is still allowed – to treat consumers.

Yesterday, at last, a major commercial bank CEO broke ranks and articulately made the case against the actions and structure of Big Finance, specifically Goldman Sachs - see Robert Wilmers, head of M&T Bank, writing in the Washington Post. Hopefully, the finance lobby will more generally follow his lead – both in speaking out against the dangers of the biggest banks (and their “innovations”) gone bad, as well as in favor of protecting valued consumers against outrageous scams.

If consumers don’t trust financial services – and why should they, given all we’ve seen? – this will be a long and painful recovery. Given what we know and have learned painfully about how our financial system operates, saying that “the market will provide consumer safety” is essentially the same thing as saying “the market will not provide” – you’re on your own, again.

Comments

[Mark Bern:]

Well, it seems that the author conveniently left out one of the tried and true methods of cleaning up the practices of "bad banks": let them fail. By bailing them out, our government has put their stamp of approval on their bad practices.

This is not to say that the consumer does need to be protected. I still believe that we had most of the protections in place that were needed until Congress repealed some of the regulations created to avert such problems during the 1930s. I believe that the Congress of the 1930s did what was necessary to create a stable banking system and it worked until it was dismantled by our current elected officials who, for the most part IMO, do not understand the ramifications of the legislation that they pass into law. They are more concerned with getting reelected and listen to those who can do the most to help them succeed in their careers.

Jul 28 11:55 AM

[Stimpy:]

WHO RUN BARTERTOWN??????

Jul 28 12:11 PM

[Alan Young:]

Looks like it's the Republicans who are engaging in Orwellian tactics: "ignorance is freedom." It's ridiculous to pretend that the average citizen with a full-time job and a family to care for has the time and ability to analyze compare complex financial instruments in order to make sure they are fair and sustainable.
This legislation is long past due. The finance industry has been flirting with quasi-criminal behavior for years (how did all those home appraisals keep rising, again?), and it's hard to believe that they can still get politicians to shill for them.

Jul 28 12:21 PM

[stockferret:]

Isn't consumer protection in the best interest of the financial institions anyway? Without faith and confidence in the banking sector this recovery is going to be much longer and much more painful. If I want to engage in buying some complex financial instruments I certaintly wouldn't trust these bozos (wall street) to have my best interests in mind.

I truly don't understand the fight against this kind of regulation. Would you ride any rides at the amusement park if the amusemet park industry fought this strenuously against inspections?

Jul 28 12:47 PM

[TradingHelp...:]

The tax-payer is right to be suspicious of the banking and financial sector. Madoff, Stanford, a banking collapse due inadequate risk controls and ridiculous bonus payments to a privilged few. Need I go on? There has been a sad catalogue of events and in each case the man of the street has lost out.

I have been looking very hard, for months, for a politician with the intellect, balls and moral qualities to step up and sort this mess out. I am still looking.

Jul 28 12:55 PM

[La Marque:]

The author is right about 2 things:
1) The government gave big finance a free pass late last year and earlier this year.
2) American consumers need a financial protection agency. Plain vanilla is not the only choice, The others need further explaining. Your broker cannot execute options on your behalf without explaining them and having you sign that you have at least read the 104 page NASD booklet. Why should mortgages be any different.

Appearantly, a lot of folks believed that interest rates would never go up and signed away their futures. This is only one reason that we need a CPFA with it's own authority to enforce the rules.

Jul 28 03:16 PM

[dcb:]

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Last updated: 10:48 am
July 28, 2009
Posted: 2:59 am
July 28, 2009

Goldman Sachs' uncanny ability to make money during the recession has drawn the attention of a bipartisan group of House members who suggest the investment bank took taxpayer dollars and ratcheted up the risk in order to pay fat bonuses.

The congressional members, including Reps. Alan Grayson, (D-Fla.), Ron Paul (R-Texas), Maxine Waters (D-Calif.) and Walter B. Jones (R-NC), wrote a two-page letter yesterday asking the Federal Reserve to explain why it granted a special exemption allowing Goldman to take on more risk over the past few quarters.

"The company and its employees have taken full advantage of its new government subsidies, and the retained ability to bet big," said the letter.

Goldman sought bank-holding company status late last year because the move would offer the financial institution easier access to taxpayer funds. In exchange for that access, the firm would face more oversight from the Fed and stricter rules that would require it take less risk.

However, the Fed granted Goldman, along with Morgan Stanley, temporary exemptions that allowed them to take on the same risky bets an investment bank would have.

That risky stance helped Goldman post a second-quarter profit of $2.7 billion on revenues of $13.76 billion -- a performance that could see every Goldman employee's bonus amount to $772,858, the representatives' letter noted.

"I think we should do our best to find out as much as we can about [Goldman], especially with all the bailout money that's been spent," Paul told The Post.

Dear folks, this sort of thing is exactly why you need to keep writing
the banking committes. lets keep the pressure on!!!!!

Jul 28 08:20 PM

[derryl:]

It's encouraging to have someone of Simon Johnson's experience, understanding and influence advocating for reforms and a return to regulations that worked for many decades and will work again if they are reinstituted. One of the 'big guys' is on the side of right, for a change, rather than lining his pockets by shilling for 'the dark side'.

Jul 28 09:42 PM

[WorkerB:]

There will be new regulations. In the past the right would stake out a position representing some extreme version of their philosophy and the left would do the same. They would fight it out make sausage and generally end up with some version that more closely represented the overall sense of the American people. Those on the right would be disappointed that free market zealots would not be allowed to hang any individual out to be skinned alive and stripped of every hard earned cent they own while those on the left will be disappointed that they cannot define every hair in a part since they have vastly superior hair parting knowledge and have only and quite sincerely the individuals own best interest at heart. So far, it seems like business as usual.

But it isn't. Since April, I have been struck at how the recognition of the oligarchs role has permeated the consciousness of people of all political stripes. Treasury Secretary Tim Geithner. Secretary Geithner isn't in the red corner or the blue corner, he is in the oligarchs corner, undoubtably with the best of intentions. To see Simon Johnson dismiss his overall banking policy as "problematic" is disheartening to those of us who saw him as the hero of the average citizen. Thankfully, oligarchies are not something most of us are very familiar with, but it is certainly a concept that most of us can understand.

Aug 01 10:11 AM