I felt certain when I read the Financial Times headline, “Proposal sees consumer watchdog role for Fed,” that I must have woken up in a bizarre parallel universe (but that is probably unfair to pretty much all universes parallel to ours: I imagine it would be very difficult to have one more perverse than ours). But no, sadly, this headline is for real; the only possible good news in this account it that this dreadful idea is far from a done deal.
Putting the proposed consumer financial services watchdog in any existing agency, save perhaps the FDIC, no matter what the professed logic is, is really a plan to neuter it (ironically. Richard Shelby, who was the original moving force against having the proposed new agency be independent, wanted to house it at the FDIC; it is the Democrats who are now responsible for the further devolution of this plan). The Treasury, Fed, and Office of the Comptroller of the Currency are notoriously bank friendly. Think they are gonna do anything to seriously inconvenience their charges? Not on your life. The sole reason the FDIC could be a viable choice is that it is the only Federal bank regulator that is serious about enforcement. And that is due to the simple fact that if they mess up on enforcement, they wind up with more dead banks, which is embarrassing, costly, and a ton more work for them than preventing train wrecks in the first place (to the extent they can).
And as bad a choice as the Treasury was (the former planned place to bury the financial products consumer protection agency), it would be part of the Administration, and hence subject to political pressure. Although the Fed is in the process of getting its wings clipped a tad, has managed the neat trick of playing an increasingly political role (starting with Greenspan, in a break with the practice of past Fed chairman, of weighing in on policy issues) while remaining utterly unaccountable to anyone.
The concerns and realities of ordinary people have simply not registered with the Fed (in fairness, consumer protection has never been part of its charter). But the Fed was negligent in executing duties assigned by Congress on the consumer front. Congress did pass something called HOEPA (Home Ownership and Equity Protection Act) that defined subprime mortgages and called for subprime activity to be reported to the relevant regulators. The Office of the Comptroller of the Currency, which also oversees banks, used HOEPA to monitor subprime lending and rein in extreme behavior. The Fed could have done so, but chose not to. In June 2007, Congress was pressuring a resistant Fed to rein in abusive mortgage practices. And did that have any impact? This update, right before the storm burst, July 2007:
A good old-fashioned showdown is set for this week between the Congress and the Fed. Congressmen are hoppin’ mad at the Fed’s failure not only to act to stem overheated and sometimes predatory subprime lending, but also its patent lack of enthusiasm in doing anything to keep this and other predatory practices from recurring. And they have some justification for their annoyance. While admittedly the Fed regulates only a portion of the institutions that were involved in subprime lending, it failed to use the tools it had available, most notably the Home Ownership and Equity Protection Act (by contrast, the Office of the Comptroller of the Currency, made use of HOEPA and had relatively few abuses among the banks it supervises).
There is a reason the Fed has been so tone deaf on this issue. It does not see borrower protection as part of its job (it isn’t part of the original Fed charter) and the little we’ve seen directly also suggests the Fed is a staunch believer in free market ideology (remember, Greenspan was an acolyte of Ayn Rand and Bernanke hasn’t had the time to put his own stamp on the institution).
Congress is threatening aggressive moves, namely, moving some of its regulatory authority to other agencies, if the Fed doesn’t fall into line.
And consider this quote from Dodd himself:
“They had a job to do, and they didn’t do it,” said Senate Banking Committee Chairman Christopher Dodd, (D., Conn.), of the Fed’s performance. “A lot of people are hurt, and I’m angry about it,” added Mr. Dodd, who is seeking the Democratic presidential nomination.
Yves here. Do we have a single shred of evidence to support the notion that the Fed has undergone a miraculous conversion experience as a result of the crisis and will now act as staunch defender of the little guy? I certainly haven’t seen it.
In fact, the central bank already has broad authority to bar practices it sees as unfair and deceptive. The push to create an independent consumer financial services watchdog was precisely because the Fed and other regulators had been so hopelessly derelict in exercising these duties.
Congress was prepared to strip the Fed of some of its authority three years ago due to its abysmal failure to do anything about subprime abuses, even in the face of rising defaults, media coverage of fraud, and pressure from Capitol Hill. Now Dodd is prepared to reward the Fed for the very same conduct he roundly criticized three years ago. We can only assume he has already started serving his post-Congressional constituency.