I was a guest on NPR’s Planet Money on Friday’s episode, Attack of the Special Interests, where I help explain some of the issues related to the Consumer Financial Protection Agency (CFPA), resolution authority, and derivatives reform coming out Monday, and how the special interests will try to weaken them.
There’s a really awesome moment in it. They asked me about the House’s CFPA exemptions that have been carved out by special interests, and I mention how auto loans have been exempted. I told them that it was put in by a congressman from California who owned a bunch of car dealers, but I wasn’t sure of the congressman’s name.
So they had two additional interviews lined up after me, Rep Brad Miller (D – NC) and Rep John Campbell (R – CA), congressmen they discuss issues with for Planet Money, and right before they start the interview with Campbell their producer figure out it was Campbell who put in the auto loan exemption! So if you listen you can hear him defend it after being called out as the pointman of the exemption I advised Planet Money to watch for. Heh.
An Amazing Machine
Here’s my real problem, and it’s a serious one. Campbell asked for an auto loan exemption to be put into the CFPA, moving it into the direction of a crony corporate welfare bill. He then voted against the final bill. He also voted for a last minute amendment – the “Idaho Amendment”, which came very close to passing – that would have killed the original CFPA in the bill and replace it with a significantly weaker version.
Follow this pattern, but in slow motion. It shows up in health care, the stimulus and everywhere else in 2009, but with financial reform it is very easy to see. Democrats wants a bipartisan financial reform bill. So they take a good CFPA and water it down and give all kinds of crony exemptions so Republicans like John Campbell will support it. Then Republicans vote against it anyway. The Republicans then hire Frank Luntz to come up with language about how the CFPA is a bad idea because Elizabeth Warren and Obama are in the pocket of auto lenders and are engaging in crony capitalism, and how heroic people like John Campbell stood up and voted their conscience.
As a machine, it’s amazing. If this GOP good-policy-killing-and-deception machine was a car it would get like 100 miles to the gallon. It’s a terrible thing to do, to score cheap political points at a moment when the country desperately needs to get its arms around financial reform, but man is it efficient. And it’s working every time.
Is it a good idea to trade auto exemption for a Republican vote? Honestly I have no idea, I’m not a politician and I can’t follow all the horse trading going on with those kinds of things. But if you are going to trade a crony favor for a Republican vote, you should actually get the vote! Call me old-fashioned.
So good for Chris Dodd for going it alone with coming up with a financial reform bill. It would be one thing if weakening the bill would bring bipartisan support; instead it is all just an amazing headfake by the Republicans to get to eat the cake of crony capitalism but also call the Democrats gluttons during the midterms.
I did get one thing wrong; I said that Campbell owns car dealers. He does not. He did for 25 years, but not anymore, and as he clarified for Planet Money: “I own real estate in which a couple of my tenants are car dealers.”
He doesn’t believe that there is anything wrong with this exemption. I was actually uncertain on how big of a deal this exemption was until I was convinced by friend of the blog and MMBM co-author Raj Date’s writing on this matter. Here is his Auto Race To The Bottom policy paper over at Cambridge Winter, which is your required reading of the day if you are interested in consumer financial access and reform, and a brief summary of it he wrote at Baseline Scenario (notice the special guest appearance by shadow banking!):
…Even by the low analytical standards applied to hastily arranged, crisis-driven corporate welfare initiatives, the exemption of auto dealers from the CFPA appears profoundly ill conceived….Dealers are not a niche part of some obscure and immaterial market; they are the single largest channel (with 79% market share) in the origination of auto loans and leases, a business that (at more than $850 billion in outstandings) is larger than the entire U.S. credit card industry…Moreover, auto finance is demonstrably susceptible to unfair and deceptive practices, and those practices are demonstrably not held in check by private market forces alone….
The auto finance market consists of two basic distribution channels: the dealer (or “indirect”) channel, which is generally funded by a handful of large national banks and Wall Street capital markets platforms; and the retail (or “direct”) channel, which generally consists of credit unions and community banks. By artificially distorting the auto finance market in favor of the dealers’ distribution channel, the exemption encourages the primacy of Wall Street funding sources over traditional bank deposit funding. As evidenced by the crisis, intentionally chasing businesses from traditional banks and credit unions into Wall Street funding models creates the real potential for disruptive volatility over time.
Finally, the exemption also offends even the most basic principles of regulatory fairness. Free-market adherents should be dismayed by the notion of specially permissive regulatory treatment for some classes of politically powerful market participants. We should not be stacking the deck in favor of the already-dominant players with the most dubious customer practices (auto dealers and the captive finance companies and Wall Street houses that fund them), and thereby discriminating against competitors with more transparent, customer-friendly business models (community banks and credit unions chief among them).