A fair bit of ink has been spilled on the idea that what is often called “innovation” in financial services is a fancy way of saying “extortion racket.” I was cheered when Paul Volcker put the ATM on his list of banking innovations and seemed unable to come up with anything worthwhile since then. Similarly, Martin Mayer described innovation in banking as using new technology to do that which was forbidden under the old technology.
A related bit of NewSpeak is “efficiency.” Businessmen will often argue that certain measures should be undertaken because they are more efficient. That is code for “because everything will go faster/more smoothly, we will make more money.”
Now why does this idea deserve critical scrutiny? Well, for instance, disclosure, ranging from product labels to SEC filings, is inefficient. Anything that helps public safety is inefficient. Democracy is inefficient.
Moreover, if you put on your systems design hat, too much efficiency is a VERY bad thing. A highly efficient system, as Richard Bookstaber reminded us in his A Demon of Our Own Design, suffers from “tight coupling,” which means that activities propagate through the system so rapidly that they cannot be interrupted. That in turn means it is very easy for processes to amplify and spin out of control. Systems designers give safety and stability top priority, and efficiency second.
And now we have “efficiency” possibly turning the Consumer Financial Protection Agency legislation into a Trojan horse to gut state oversight of banking. It was the states, not the Feds, that went after a host of abuses, starting with dot com stock touting to auction rate securities to dubious mortgage lending practices.
The row started when Representative Melissa Bean of Illinois, who sits on the House Financial Services Committee, added an amendment to the draft bill (which could come to a vote today, call your rep!) that would bar states from having measures tougher than the Federal standards. As Huffington Post noted (hat tip reader Barbara):
Bean is the co-chair of the pro-business New Democrat Coalition’s financial services task forced and vies for the title of Wall Street’s favorite Democrat. Bean and other New Dems are tussling with committee progressives over federal preemption. If Bean’s measure carries, states would not be allowed to enforce consumer protection laws on national banks that are stronger than those at the federal level. All banks would need to do, then, is water down regulation at the top, rather than in each state legislature.
Lisa Madigan, the Illinois Attorney General, is not taking this lying down and has fired off this salvo to Bean:
Federal regulators have maintained that national banks did not play a significant role in precipitating the crisis. That claim does not comport with the facts. The Center for Public Integrity found that 21 of the 25 largest subprime lenders during the lead-up to the crisis were financed by large banks….In contrast, in the run-up to the current crisis, many state attorneys general (including my Office) aggressively prosecuted the bad actors in the industry within our reach….
Federal laws have frequently stymied state reform efforts. These laws preempted states from regulating certain risky loan terms and features, such as prepayment penalties and negative amortization, regardless of whether a state-chartered or federally licensed entity makes the loan. It was precisely these types of features that led to widespread abuses….State attorneys general saw abuses of the prepayment penalties, which often locked borrowers into unaffordable subprime mortgages. Yet federal preemption barred states from enacting tougher laws to address these abuses, even as applied to those entities that we regulate.
National banks and thrifts claim that allowing states to enact tougher laws when necessary – as the CFPA Act would – will result in too great a burden on the system. That argument is disingenuous. Many of these lenders are multi-national companies that currently have to comply with a vast array of varying rules both inside and outside our nation’s borders. In fact, as demonstrated by the swollen docket of our nation’s foreclosure courts, national banks seem to have no problem complying with the varying state and local laws governing the foreclosure process.
And of course, the real point of this exercise is obvious. It is is much more “efficient” for banks to assert their control over the country at the Federal level, where they have already made impressive inroads, than to have to also deal with rearguard efforts from pesky and persistent state officials.