Why Banks Should Support a Consumer Financial Protection Agency

In thinking about the forthcoming economic recovery, many people — including articulate corporate leaders — rightly emphasize the importance of consumer confidence. Our economy is largely consumer driven and while some increase in personal savings is surely warranted, if we collectively try to save “too much and too soon,” it will mean sluggish growth and persistently high unemployment.

At the same time, it is striking that many of the same corporate leaders — and their lobbyists — emphasize their determination to defeat the administration’s proposed Consumer Financial Protection Agency. This agency would act as a form of safety commission for financial products, with an eye to preventing the kinds of abuses that have characterized mortgage lending, credit cards and other retail financial products in the recent past.


Elizabeth Warren, head of the Congressional Oversight Panel, is advocating a Consumer Financial Protection Agency over the protests of financial institutions.
Elizabeth Warren, head of the Congressional Oversight Panel, has been the most articulate advocate of a consumer protection agency, including with a blog post Tuesday and a YouTube video released on Monday.

As Professor Warren points out in some detail, the primary counterarguments against the agency are based on either misunderstanding or misinformation. The consumer protection agency would not prevent the creation of products by the private sector, but it would make it much more likely that the products are not toxic for the people who use them — in the same way that we worry about the safety of cribs or medicine. This would actually encourage sensible forms of innovation.

But, in addition, there is an important reason to think that protecting consumer safety on financial products would support exactly the kind of broader confidence that business is looking for.

Many consumers were burned, one way or another, by a financial product in recent years. They are now suspicious. They can spend time looking for vanilla alternatives from reputable companies, but, frankly, everything is to some extent tainted.

What happens when there is a scare regarding food contamination in the United States or globally? People buy less of that food until the government assures them that: 1) we now understand the cause of the problem; and 2) it will not happen again.

Word has gotten around that many financial products are not safe — as well as the idea that the debt levels encouraged by the finance industry are not always healthy. Consumers are going to be more careful and, if there is no way to reassure them fully, they may be excessively careful.

In addition, we have learned that allowing financial firms to abuse consumers is bad for our overall financial system health — leading directly to the current crisis, loss of jobs and still rising unemployment; all of this further undermines confidence of all kinds. If the financial system can turn nasty or even nastier, we should all carry more “precautionary” savings.

There’s no question that some financial firms would like to return to abusive practices, figuring they can once again make money and then move on. Yet serious financial sector firms would prefer to clean up their acts and work with properly informed customers. These firms are making a bad mistake in opposing the consumer protection agency.

If the agency does not make it through Congress –- and right now it seems a tossup –- this will just feed the enmity against finance more generally and possibly in the 2010 midterm elections and beyond. There is no way that is good for overall confidence. It just doesn’t make sense for well-run financial firms to go down this road.

Thought leaders in the industry, the American Bankers Association, the Financial Services Roundtable and other interest groups should switch their positions and support the consumer protection agency — if they really want consumer confidence in financial products and in general to return.

Source: economix.blogs.nytimes.com