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  • Consumer Financial Protection: Thinking Outside the Boxes

    Is a congressional compromise on financial services regulation in the works? Steven Pearlstein of the Washington Post today reports the answer is “yes,” citing progress in negotiations between Democratic Sen. Chris Dodd of Connecticut and GOP Sen. Bob Corker of Tennessee. Specifically, Pearlstein points to a breakthrough on one of the major sticking points of the debate: whether to create a new agency to enforce consumer protection laws in financial service markets.

    As described, the compromise proposal may alleviate many of the potential organizational objections to the idea. Nevertheless, the new regulator could hurt — rather than help — consumers.

    The creation of an independent super-agency dedicated soley to consumer regulation has been a centerpiece of President Obama’s financial regulation agenda. But, while it was approved last summer by the House, the idea has languished in the Senate, as opponents have pointed out that a consumer regulation agency independent of other banking regulators would foster confusion and bureaucratic infighting, and actually undermine efforts to assure the safety and soundness of banks.

    According to Pearlstein, Dodd and at least one Republican — Corker — have come up with an alternative: a single regulator with two divisions, one to enforce consumer protection laws, and the other to look after the safety and soundness of financial institutions.

    The idea seems to address the organizational objections to the plan — facilitating coordination between the two roles. But before the champagne is uncorked, negotiators should take a step back — there are still many more troubling questions about this new regulator that have not been answered.

    One is how extensive its scope will be. Will it regulate only banks with a national charter or financial institutions more generally, as Obama proposed? “Financial services” is a broad term, and could include virtually anything not sold with cash on the barrelhead. If jurisdiction is broad, the new agency could have a dangerously unlimited reach. An agency with broad jurisdiction could also undermine the work of other agencies, particularly the Federal Trade Commission, which has broad responsibility and expertise in consumer protection.

    Even more important is what (if any) new powers the agency will have. It’s one thing to gather in one place the existing — and entirely sufficient — powers now held by a variety of other financial services regulators. But Sen. Dodd (and President Obama) have proposed to confer vast new powers on the regulator as well, including ill-defined authority to regulate “unfair” practices, limit sales practices, restrict advertising and more.

    Such new powers are not only unnecessary, but harmful — limiting innovation and choice, and raising costs for the very consumers they are meant to protect.

    As negotiations on these complex issues move forward, Congress should move with care and check the details. Containing the dangers of new regulation is not just a matter of organizational boxes.

    Posted in Economics [slideshow_deploy]

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