Are We Trading Away Real Bank Regulations for a Consumer Protection Agency ?

Noam Scheiber puts forth an interesting discussion yesterday about the DC horse trading in Street Fight. Scheiber argues that the right is going to give in on the idea of a Consumer Protection Agency in exchange for toothless financial regulation:

“Last week, Alabama Republican Richard Shelby, the ranking member of the Senate Banking Committee, floated a compromise on the consumer financial protection agency that’s currently stalled in the Senate. Under the bill Chairman Chris Dodd moved through the committee in March, the consumer agency would effectively have its own budget and an independent, White House-appointed director. It would also have significant (but not unchecked) authority to write and enforce rules protecting consumers from abusive bank practices, like deceptive mortgages. Until now, the banks and the GOP have largely tried to eviscerate these provisions. But, according to one person familiar with the discussions, Shelby’s proposal took a big step in the direction of the Dodd approach. (Spokesmen for both senators declined to comment beyond saying that “we continue to discuss a number of options,” as Shelby’s communications aide, Jonathan Graffeo, told me.)

Shelby’s recent outreach seems to reflect the new reality in the battle to tame the banks: Both sides recognize that the reformers have the momentum, given the way last month’s health care victory has unified Senate Democrats, and given the political peril for Republicans in appearing to do Wall Street’s bidding. But both sides also recognize that, p.r.-wise, the consumer agency tends to overwhelm other elements of the reform effort.

In light of this, Republicans seem to be settling on a strategy: Give the Democrats much of what they want on the consumer agency and bet that Democrats won’t be too picky about the rest. If the bet pans out, the industry and its GOP allies would, in effect, be trading a robust consumer agency for a chance to scale back a number of highly consequential but below-the-radar reforms. But will it?

I hope that Congress doesn’t make this compromise. The Consumer Protection Agency might be a nice way to provide some education about finance to the average American, and help to reduce fraud, and increase transparency in consumer contracts,. However it had less to do with the cause fo the crisis than many other factors. Reducing leverage, re-regulating derivatives, maintaining adequate capital, separating insured deposits from more speculative activities are much more importnant.

What are the odds that genuine financial reform will pass Congress? Will we get something significant, or will FIn/Reform be yet another giveaway to the banks?

The people who think reform has a chance — are they wishing on a star, or wasting their time?


Street Fight
Noam Scheiber
TNR, April 4, 2010

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