What Good Will the Consumer Financial Protection Bureau Do?

Interesting post by Megan McArdle. Excepts:

"James Surowiecki argues that bankers should welcome the CFPB, Elizabeth Warren's brainchild, as a possible source of salvation rather than ruination.

While some bankers accept the need for consumer protection, they maintain that the C.F.P.B. will go too far and end up strangling financial innovation. But, over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of "The Jungle." Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world's most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn't always know what's good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.

I'm second to none in my appreciation for the FDIC, but this is an excessively rosy reading of regulatory history. The regulations that gave us the FDIC and the SEC also gave us a number of stupider regulations, like centrally fixed interest rates for savings accounts, and the infamous Regulation Q, which fixed the interest rates on checking accounts (demand deposits) at 0.0%. Among other things, the interest rate regulations played a major role in the Savings and Loan Crisis, and they led to the creation of money market accounts, which operated outside of the FDIC system, and played a major role in our most recent financial disaster; a run on the money markets was ultimately what seems to have convinced the government to start spraying money into the financial system with a firehose.

This is not to say that Regulation is Teh Stupid, but that some regulations are stupid and some are not. You cannot defend the Consumer Financial Protection Bureau by arguing that some regulation at some point in history worked (any more than you can indict a regulation on such thin grounds). If the examples are similar enough they may be admitted into evidence by the defense or the prosecution, but ultimately, the regulation has to win the case on its own merits."

"Advocates for the CFPB like to talk up transparency. Who's against transparency? But when you dig down a little, the problems that they're talking about aren't really solved by transparency. Take the high-annual-fee credit cards, or the lousy mortgages: these were things around which there was already quite a lot of transparency. Too much transparency, in fact. When we signed our mortgage last October, I shocked the hell out of everyone there by reading everything. I'm a financial reporter. I doubt I understood most of it. I signed anyway.

Most people don't even do that. So we frequently hear that there's too much information, now, and we need to simplify: better transparency, instead of just more. But long before the crisis we required simplified disclosures for both mortgages and credit cards; you got a sheet saying what your annual rate was, the minimum monthly payment, etc. Where the loan was adjustable, people had to be told that their rate could adjust. They didn't read it. Or they didn't understand it. Or they figured they'd pay of the car or refinance the house long before that happened.

The problem isn't that banks don't have the right disclosure form for high-annual fee credit cards; it's that people don't want them. Maybe they shouldn't want them. Maybe we should only get the things that Elizabeth Warren wants to give us. But now we're not talking about transparency. We're talking about the Consumer Financial Protection Bureau "protecting" you right out of financial products that the paternalistic technocrats don't think will be good for you. And that's problematic, both because it assumes that people are kind of like children, and because that protection often carries a high price. Usury Laws used to "protect" poor people from very expensive loans; they are often spoken of fondly by consumer advocates ruminating about payday lenders. The laws protected them so well that many of them couldn't get loans at all, and had to pawn their stuff, borrow from friends and family, or hit up a loan shark.

There's also the fact that adding any regulatory layer inherently advantages incumbents over newcomers; it's hard to enter a new market that requires an immensely expensive compliance department just to open the doors. That has its advantages--firms are stodgier, more easily regulated, and less likely to get into trouble the way they did in 2008. It also has a lot of drawbacks. Such banking services are expensive for both depositors and borrowers. They're also not necessarily as worried about efficient capital allocation, since excessive profits tend to attract the beady eyes of the regulators, so there's a risk that profits will be distributed as things that managers and shareholders can consume, like junkets and loans for friends and family members, rather than compensation or dividends."