courtesy Frank-W (flickr)

courtesy Frank-W (flickr)

It isn’t all bad out there. The Consumer Financial Protection Agency bill, HR 3621, was passed by the Barney Frank’s House Financial Services Committee. On Friday, Michael Barr, the Treasury Assistant Secretary for Financial Institutions, held a call-in conference. I asked him how much time it would take to enact regulations under the Administrative Procedures Act. He said that the agency will be able to enforce all of the existing statutes and the rules under those from the day it opens for business, Section 163.

It almost doesn’t seem fair to point out problems. A number of financial businesses were exempted: car dealers, insurance companies, and retail credit like department store installment sales contracts. Another amendment limits the inspection of community banks to some extent; but Barr said the provisions will not limit enforcement, just inspection. The cowardly Democrats are willing to dump on their allies by supporting Michelle Bachmann’s Anti-ACORN amendment.

On the other hand, the bad pre-emption provision offered by Melissa Bean didn’t get into the bill. Kudos to Knoxville, who bird dogged this one all over the place. The pre-emption clause added by this amendment seems somewhat better than the one in the original bill, in Section 143 (available here, search for it by name, Financial Consumer Protection).

The bill focuses on unfair trade practices, an underdeveloped area of law. A simple example is the right of credit card issuers to change interest rates whenever they want to, for no reason. This disgusting practice is a significant contributor to bank profits. Treasury people give the example of banks cheating customers by automatically enrolling them in overdraft protection programs, then manipulating the rules to increase fees. This will certainly be stopped by new regulations, unless the bank regulators persuade the new agency under this provision, which I would prefer to be a bit weaker:

The Agency shall have no authority under this section to declare an act or practice … is unfair unless the Agency has a reasonable basis to conclude that the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

The refusal of the Bush administration to enforce rules was one cause of the financial crash. By moving enforcement to a new agency, we could avoid that problem completely, we could appoint a whole new set of enforcement people. Unfortunately, this may not work. The law requires the transfer of current employees, subject to the discretion of the new agency. Let’s hope the agency gets a personnel officer who understands the problem of moles.

One measure of a bill is the quality of its enemies, which in this case is poor. Academic opposition includes Joshua Wright of George Mason and David Evans of the University of Chicago, funded by the American Bankers Association, known haters of regulation. Andrew Leonard writing at Salon provides a great description of a take-down by Georgetown’s Adam Levitin, which accuses the authors of making up numbers from thin air.

Wright wrote another paper with Todd Zywicki, a colleague at George Mason, and perhaps the only academic who supported the Bankruptcy amendments of 2005.

Let us repeat that to make it clear—there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred.

Alan Greenspan disagrees:

Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

Other people disagree too:

Mr. Greenspan’s critics say that he encouraged the bubble in housing prices by keeping interest rates too low for too long and that he failed to rein in the explosive growth of risky and often fraudulent mortgage lending.

A genuine consumer protection agency would have enforced rules against predatory lending. Surely Wright and Zywicki would admit that enforcement would have made a difference. I’ve heard Zywicki explain his support of the bankruptcy amendments, and he was just as ideologically driven.

Another enemy is Anthony Randazzo, writing for the Reason Foundation, a libertarian group:

As Congress prepares to move forward on financial services regulation, it’s worth taking a step back to look at the proposals for what they really are: behavioral control mechanisms.

That’s supposed to be an argument. What can I say? Ayn Rand is a powerful drug for some people.

The proof will be in the pudding. Will Congress fund the agency adequately? Will it appoint ferocious regulators? If we want this to work, we have to stand on the agency just as hard as we stand on Congress.