The Chamber of Commerce Has It Backwards

By Simon Johnson

The US Chamber of Commerce is opposing the administration’s proposed Consumer Financial Protection Agency, on the grounds that it would hurt small business. Their argument is that this agency will extend the dead hand of government into every small business.

For the Chamber of Commerce, government is the enemy of small business and should always and everywhere be fought to a standstill. Chamber Senior Vice President (and former Fred Thompson campaign manager) Tom Collamore sees this as “advocacy on behalf of small businesses, job creators, and entrepreneurs” (quoted in the WSJ link above), and the Chamber has launched the “American Free Enterprise” campaign.

Somewhere, the Chamber’s senior leadership missed the plot. What brought on the greatest financial crisis since the 1930s? What has hammered, directly and indirectly, small business of all kinds to an unprecedented degree over the past 12 months? What is killing small and medium-sized banks at a rate not seen in nearly 80 years?

It’s the behavior of the financial sector, particularly big banks and their close allies – by consistently mistreating consumers. And the letter and spirit of the regulatory regime let them get away with it.

Some members of Congress honestly believe that consumers should have a free choice, unfettered by any kind of restriction, regarding the financial products they buy.

But spend time talking to any marketing professional or call them to testify before your committee – or just ask Mr. Collamore, who was previously at Altria. The state of knowledge regarding how to persuade people to buy stuff is impressive, the degree of potential manipulation for consumer preferences is simply stunning, and the “innovations” in this area are not slowing down.

The scope for taking advantage of consumers in subtle ways, or outright duping them, is probably higher for finance than for any other sector. For fairly obvious reasons, people are more likely to misunderstand credit than, say, furniture. Ambitious executives have therefore hammered hard on borrowers. And the implications – as you have seen and are still seeing – of systemic financial misbehavior is awful in terms of human impact and essentially without limit in terms of ultimate macroeconomic downside.

Unscrupulous Finance has brought us down and will do it again. Those most damaged now and in the future include small and medium-sized business owners who are trying to treat customers fairly.

The Chamber of Commerce is fighting the last war (or the one before that). Their small business membership should wake up to the current reality and press the Chamber hard to change its position before it is too late.

President Obama needs to go over the heads of the Chamber’s leadership, reaching out to and running ads directly targeted at its small business membership. The White House has to tackle this head on, framing the issue clearly for people, with the help of very clear TV and radio ads. The Chamber of Commerce is arguing that unfettered finance is good for small business. They are wrong.

Comments

[John Lounsbury:]

Simon - - -

Great points. It amazes me that 1% of the populace has been able to capture the philosophical hearts of 40%-50% (or more) of the people and has been able to gain effective control of the federal government, regardless of party. Marketing experts, indeed! How can anyone who has the love of free enterprise and capitalism that I do fall for the manipulation that has occurred over the last several decades? Gullibility is the kindest characterization I can make.

Oct 15 11:13 AM

[Alan Young:]

Good article. The Chamber is already melting down over its reactionary stance on climate legislation, so this could be just another nail in the coffin.

John L.: The 1% has not captured 40-50%; it has only captured congress and the presidency (repeatedly). If Congress had the guts to vote as their constituents wanted instead of obeying orders from lobbyists, we would have a very different government.

Oct 15 12:25 PM

[nym:]

It's time for the president to take his eye off the 2010 and 2012 elections and do what's right for the country. Lincoln would have.

Oct 15 09:49 PM

[derryl:]

After over 30 years in small business I share Collamore's dread of all things government. We prosper because we are nimble and we innovate into niches. One size fits all government regulation destroys our success strategy. So we circumvent and resist.

But I have to agree with Simon on the CFPA. Every business owner is liable for any harm done by his own or his employees' failure to idiot proof our operations. We are held responsible for any accidental harm or damage any citizen is deemed to have suffered as a result of our failure to 'take adequate precautions', which is code for, "Business owners have all the responsibility, citizens have all the rights".

I'm not suggesting this is as it should be, merely stating how it is. I think citizens should be treated in law as semi intelligent adults rather than as curious and vulnerable toddlers prone to unwittingly getting themselves into a spot of trouble.

But why does this same principle not apply to finance? If I sold products that blew up in my customers' faces I would be sued into penury and shut down. Every manufacturer has to idiot proof his products before the regulators even allow them on the market. Consumers are protected in virtually every industry EXCEPT finance.

I am no fan of safety nazis but I have taken my medicine and am careful to allow no harm. Financial businesses should have to take the same medicine as the rest of us. Or set us all as free as the bankers and let the buyer beware.

Oct 15 11:22 PM

[THofler:]

The CFPA will simply aid and abet consumer irresponsibility in the same manner Fannie & Freddie did (is), until our credit markets are completely shot. But I suspect Simon knows this, since the result will be a gigantic wealth transfer from the investor class to the proletariat.

This would be a wealth transfer similar to the one he suggested 9 months ago when he said that all major US banks be seized by the gov. What plans did Simon have for the bond and preferred holders of the seized banks??

Oct 16 12:23 AM

[John Lounsbury:]

THofler - - -

I should let Simon speak for himself, but I have written extensively on the subject and often agree with Simon's conclusions.

The process that I supported, and still think would have been the quickest and cheapest way to resolve the crisis, was government receivership action for a controlled reorganization of the banks that are still insolvent, as well as AIG. Would anyone else (anomg the super bigs) besides AIG, C and probably BAC have gone through this process? Maybe not, but it is possible.

In a controlled reorganization, bond holder and preferred owners would have been converted to equity positions in the reorganized companies as they came out of receivership. Full conversion might not have been necessary and then it could have been apportioned.

The so-called toxic assets would have remained with the receiving agency, with ownership tags, until their value could be resolved in the open market or through maturity or default. Residual value would have been shared with the original owner and the receivership trust. The trust share would ultimately to revert to the tax payers who would have eaten the losses from this pool as well as the operational expenses.

Advantages of this process over what has transpired?

1. The removal of the mismanagement cabal we still have.
2. A clean accounting of assets and liabilities, which we still don't have and may never have.
3. The quick reestablishment of an adequately reserved banking system, with working credit markets. This we may not have for years the way we have proceeded.
4. Much less taxpayer capital tied up, and possibly eventually lost.

Free enterprise is a great thing. What we have perpetuated is far from free enterprise. We could have been well on our way to reestablishing free enterprise already, but, unfortunately, we chose a different course.

What were you envisioning the "nationalization" process would be?

On Oct 16 12:23 AM THofler wrote:

> The CFPA will simply aid and abet consumer irresponsibility in the
> same manner Fannie & Freddie did (is), until our credit markets
> are completely shot. But I suspect Simon knows this, since the result
> will be a gigantic wealth transfer from the investor class to the
> proletariat.
>
> This would be a wealth transfer similar to the one he suggested 9
> months ago when he said that all major US banks be seized by the
> gov. What plans did Simon have for the bond and preferred holders
> of the seized banks??

Oct 16 08:07 PM