Waiting For The Big Push: Selling The Consumer Protection Agency For Financial Products

In mid-March, the administration proposed that toxic assets could and would be safely removed from banks balance sheets.  We were skeptical, and the the PPIP now seems to have slipped into irrelevance (loans; securities).  But the administration still put an impressive effort into persuading independent analysts, and broader public opinion, that they should do something clearly beneficial for banks.  This was “all hands on deck,” and it definitely had an impact on the debate, at least for a while.

Now, the administration’s major remaining initiative is its version of a Financial Product Safety Commission – something that would be clearly beneficial for the public.  And the skepticism – and outright opposition – comes from the banking sector.

How does the administration’s effort compare, then vs. now?

As far as I can see, they are not pushing this new consumer protection/safety agency hard enough.

Some sources claim that Secretary Geithner is fully on board with the Agency, and certainly he has mentioned it in public.  But there is no sign of the frenzied effort that accompanied efforts to launch the PPIP – when, for example, almost every economist in the administration seemed pressed into service to call potential critics and ask them to “give it a chance.”

One symptom of this “effort gap” is that counter-arguments and disinformation about the proposed agency begin to gain the upper hand.  One senior executive recently told me that this agency would have unprecedented powers to determine the decision of individual products – “something not even the FDA can do.”

Of course, this is nonsense.  The new agency would be powerful – and thus it is feared by the industry – and presumably it would be able to prevent sufficiently toxic products from being sold.  Hopefully, it will also be able to require that all financial institutions also offer some vanilla products, to make consumers’ choices easier.  But the idea that an agency would design the details of all products for any sector is both implausible and a malicious rumor being spread by opponents (actually, it reminds me of the pushback from meatpackers, and others, early in the 20th century). 

If Treasury is so supportive of this new Agency, now is the time to launch public, high profile, and clever counterattacks.  By the time the legislation is being voted on, it will be too late.

And in this context, the administration should push hard on one of the great ironies here.  Financial sector executives like to stress the importance of “consumer confidence,” and they urge the government to take steps to restore this confidence (e.g., with a straight face, suggesting even more really cheap credit from the Fed to their favorite sector.)

But the same people completely reject the idea that consumers will feel more confident about financial products if there is finally some serious consumer protection around those products.  Whenever people learn – or just fear – that a particular food product is unsafe, they stop buying it.  When the stock market ripped people off in the late 1920s, it took legislation with real teeth to rebuild investor confidence – take a look at, for example, the Securities Exchange Act of 1934.  And the entire edifice of modern medicine is based on the idea that someone in government will make the call, right or wrong, on whether a compound can be regarded as a helpful drug – as opposed to colored water or something actually poisonous, which is what was sold as “patent medicine” 100-150 years ago.

If Treasury and the administration really wants a Consumer Protection/Safety Agency for finance, they need to kick their support campaign into much higher gear immediately.

By Simon Johnson

36 thoughts on “Waiting For The Big Push: Selling The Consumer Protection Agency For Financial Products

  1. A mountain of moot. Few jobs means little money for consumption. Lack of consumption means fewer jobs and even less money. Q.E.D. and fiddle-dee-dee: no need to protect the consumers from products they ain’t consuming.

  2. All in favor of the concept but would like to see the details. Now why would Treasury not push this hard? Even though banks are not in favor?

    Could it be that someone does not want this to gain legislator approval. Maybe just a play act? For the idea to fail via Senate and House vote, we will get a press serve of smoke screen as the banks remain clothed in Teflon?

  3. The top three reasons this is languishing:

    1. Health care
    2. Health care
    3. Health care

    Barack W. Obama is unwilling to walk and chew gum at the same time.

  4. Come on Simon! Just watch the corrupt long time Bama familiy friend Turbo Tax Timmy arrogantly dodge Brad Sherman’s question on derivatives: Essentially;” Will the government continue to bail out the counterparties to derivatives?”

    This administration is out to protect its friends first and formost ; the public be damned.

    Congressman Sherman is a Democrat, btw , asking a simple question, and getting no answer. Both people from the left and the right are not getting answers. Maxine Waters wants to ban derivatives as illegal gambling and is supported by the people on the right. Others on the right want to audit the Fed, Others want to separate trading from banking.

    Those are simple propositions, and have bipartisan support. They should be handled simply and not thrown into yet another overarching 500 page bill with a deceptive title hiding numerous loopholes for the Bama’s favorite crooks.

  5. Health care is not why people are losing their jobs.

    Health care is not why banks are not lending.

    Health care is not why investors are afraid to invest.

    Health care reform is only an excuse to grab power for those who want authoritarian socialism. Period. The public option bill working it’s way through Congress avoids all those health care reforms that have bipartisan support. It ‘s just another attempt to control citizens lives using a hot button issue as a fig leaf to hide it’s real intentions.

  6. Perhaps a Consumer Protection Agency is a smoke-screen and a red-herring designed to distract people’s attention from the real problem.

    It wasn’t the consumers who lost a lot of money in the housing crisis. It was the taxpayers who ended up rescuing the too-big-to-fail financial institutions.

    A lot of consumers got a lot of free money out of this. They’ve borrowed and spent the money. And now they are defaulting on their debts. While the taxpayers are picking up the tab and rescuing the lenders to loaned all that money so carelessly.

    Instead of reforming the system to make sure that financial institutions will take responsibility for any of their future losses. The US government is leaving the system as it is.

    The government is only putting up some ‘consumer protection rules’ that many financial institution will probably circumvent through financial innovation. Which they are good at.

  7. So… the hot button starts the smoke screen among the play-actors in teflon clothing, who are putting a fig leaf over their gum-chewing red herrings? Does that sum it up, then?

  8. Wait, I thought it was too-big-to-fail bipartisan crooks picking up the illegal gambling tab for the fiddle-dee-dee socialist taxpayer consumption.

  9. Simon,
    What your country needs is a Consumer Protection Agency for Political Products. This agency could first look at how Al Gore has made a fortune since 2001 by selling fake GW products (the fact that he was unemployed is not a good excuse). The only problem I see with such an agency is how to avoid that Gore and his comrades capture it.

  10. Consumer protection was a necessary evil when the government wanted to talk up the markets and funnel money to the banks. People were up in arms about AIG bonuses – and were beginning to pull on the string that the AIG bailout money really went to other financial institutions – and the consumer protection initiative was the administration’s way of saying:

    “When your neighbor’s house is on fire, you put it out, and you deal with the cost of the hose and the positioning of the smoke alarms later, so stop asking about this bailout, we’ll do something to avoid recreating the situation later.”

    The three levels of the government plan for finance were:
    a) funnel money to overcome liquidity problems;
    b) recapitalize through trading profits to overcome solvency problems;
    c) talk up the market to vent public complains.

    Each of these levels has succeeded. So there is no longer any need to pay the price of consumer protection laws; the news cycle has moved on, and pushing hard right now would only waste the goodwill that could be needed if the market were to drop in the future and the government needed to be seen as “doing something.”

  11. Consumer Protection Agency…Hmmmmm
    Don’t we trust the free market solution of Fitch, Moody’s or Standard & Poor’s?

  12. MIn, thanks for your ideas. Gore’s intermediation in excess emissions credits may be named per your suggestions. I prefer to put together all his activities to fight Global Warming under just one umbrella. BTW, have you noted how successful Al has been in reducing global warming? Hope you’re enjoying your summer.

  13. When do we see the details of the consumer protection package? Until then we are articulating generalities. Well I guess that is an entertainment for some folk.

    We currently need and have consumer protecton for our roads, air travel, food and drugs. It seems we consumers have sure been dudded by the financial fraternity and the laissez faire licence to rob us blind. Makes Ali Baba and the 40 thieves look like do-gooders?

    Apart from yet another hidey hole for bureaucrats to build yet another empire, what exactly are we in favor of – or otherwise?

    Simon we need some specifics!

  14. Notabanker,
    I fully agree with you. Unfortunately, you’re not going to have any details until a law is approved. You may have read that the House just approved a 1,300-pages law and the last 300 pages were added the night before they approved it (and they did it before noon). If a Consumer Protection Agency for Political Products were created, one of its functions could be to take a reading test of laws before final approval.

  15. Thanks E. Barandiarin for the explanation. Point taken.

    What I hope Simon or someone would do is to put up a pro and con checklist (10 commandments?) which would outline the argument.

    Now if this thread with all the intellect inputting could assemble and polish a one page protection, it just might get some legs and make it into the public domain via our friend SJ, even be an input to legislation preparation?

    What do you and others think?

  16. The US has at least half a dozen consumer financial protection statutes on the books and none of them have made any difference. This bill would just be another. What we need are clear, simple laws that don’t have paperwork and bureaucracy as their main product, to wit:

    1) A national usury law, no more than X% above comaprable Treasuries
    2) A national debt incurrence limit – you cannot incur debt equal to more than X% of your take home pay and the burden is on the lender to validate this.
    3) A national down payment requirement, no purchases above $X without at least 20% in cash (Which cash may not be borrowed from another source) and no home equity withdrawals that put you below 20%.
    4) In lieu of COBRA and unemployment insurance and social security and the other zillions of programs we have for people’s financial needs, every citizen should be given a rainy day fund equal to about USD 100,000 when they become an adult and that would be available for paying bills throughout their life whenever something interrupts their income. You could invest it only in Treasuries and use it at any time or to fund retirement if not spent by then. All contributions during your life to that account would be tax deductible. When you die it all escheats back to the government. It would be a safe,defined contribution program.Then abolish all the other programs and cut the government payroll by 1/2.

    The problem with this bill is it would do so little it isn’t worth fighting for.

  17. Notabanker,
    I don’t know how much I can help you with your idea because I’m not familiar with the many agencies in charge of consumer protection in your country. Although I’m now retired, for over 20 years I worked on the regulation and supervision of banks and financial institutions in several countries, including your country. The current systems of financial regulation and supervision are aimed at controlling directly what banks and other institutions can do and how they can do it. The systems have been “captured” by banks and other institutions because they have to interact daily and the systems can do their work ONLY if banks and other institutions provide them with the necessary information. Note: In my view, the problem of big banks is not “capture” but “a marriage of convenience” between the banks and politicians.
    Thus, if you want to protect consumers, the basic principle should be NO relation between the agency and the banks. Only consumers should have access to the agency. Indeed this restriction implies that the agency can only be trusted with limited functions, but there is one that is fundamental. For most people it’s too expensive to have access to a good lawyer that can review contracts before they are signed. Thus, the agency can protect consumers by providing the service of reviewing contracts. The law must request that SOME contracts between banks and SOME of their customers have to be pre-approved by the agency.

  18. Let’s look at the Credit Card Accountability Responsibility and Disclosure Act as an example of what we might expect. I think there were some real and tangible benefits to this. However, it also came up short in one key area. While the new safeguards applied to consumers, they didn’t extend to small businesses. “An amendment proposed by Senators Mary Landrieu, D-La., and Olympia Snowe, R-Maine, to extend protections to any businesses with 50 or fewer employees was defeated in the Senate last week; instead, the final bill directs the Federal Reserve to conduct a study of credit-card use by small businesses.” The thing that worries me is that the reason this didn’t happen isn’t because no one thought of it but rather because Congress didn’t want it to happen. Sounds like the administration caved and threw the banks a bone here…which is what we’ll most likely get with the Consumer Protection Agency…some regulation but also just the right amount of bones.

  19. What do you suggest we little people do about these matters that affect us so much?

  20. There will never be an effective consumer protection agency for financial products. Big business has too much influence on Washington to let anything but a watered down version become law.

    The weak intellectual appetite of the general public for any legislation in this area is influence by media sound bites and media manipulation by big business. I expect more misinformation and duplicity, and no important legislative activity.

    Too much non-sense is portrayed a commonsense. Business as usual in congress.

  21. Uncle Billy, I worked for the WB in DC and Beijing. I don’t know about SJ’s job there, although I know well his academic research.

  22. I am a former (now retired) real estate transactional specialist, and was, at one time, on the Board of Governors of the American Land Title Association. We we constantly at war with the real estate financing industry over a set of consumer protections contained in the Real Estate Settlement Procedures Act. HUD promulgated the rules involved, and mandated things like Good Faith Estimates of Closing Costs, and the famous Truth In Lending statement. It became clear through hundreds of closings, that the members of the industry NEVER educated clients as to the content or meaning of these forms. They were great tools, and were rarely used as required because the statute was relatively weak, and did not require explanations to the consumers of the opaque data shown on these.

    I am all in favor of protecting consumers, but believe that whatever comes from any such law and concomitant regulation will have to have real teeth, and should include the requirement for counselling for larger transactions, so that there is some guarantee that consumers actually understand what they are signing.

  23. Simon,

    The Consumer Protection Agency for Financial Products is the right way to go. But most importantly, it must be administered by the individual states much like insurance companies are regulated by individual states.

    Your video statement today (from a few weeks ago) that there is no hope of turning the clock back to the Glass-Steagall arrangement of 1930s thru 1999 is short-sighted. The best way to prevent a major depression, as we are in now, is to make these corporations smaller. Allowing a few small corporations/businesses to fail will actually SAVE the overall system! There is no reason that commercial banks, investment banks, and insurance companies cannot be separated. In the 1930s JP Morgan did exactly that, it split off its investment bank into a separate company in order to comply with the Glass-Steagall law. So don’t give up on this. Too-big-to-fail is another way of saying big-enough-to-control-everyone: congress and the people. Another way of viewing what has occurred during 2001-2008 is that the investment bankers migrated their high-risk world of shady deals from a population of international wealthy investors to the population of main-stream American consumers. We need a system that separates, to the extent possible, everyday financial transactions such as mortgages and credit-card purchases from the high-risk, often shady gambles of international players.

    Ultimately, the real problem, and of course the solution, is found in the relationship between Congress and the corporate/business world. If the U.S. Constitution had a provision for legislation to be adopted via the initiative process, as has been incorporated into many of the state constitutions, we would be close to solving this problem or the problem would not exist. The U.S. Constitution is lacking in this regard; many countries have national initiatives as part of their constitutions. Congress does not get it! For over thirty years Congress has tilted our would-be democracy into a corporatocracy, or as you say oligarchy. It is not just financial corporations that Congress has sold out to, but also energy, health care, health insurance, big agriculture, and many other corporations that own Congress. Congress does not get it! It can not be business as usual. The paradigm of the last 150+ years where corporate money has controlled the political process cannot continue. Corporations are not citizens, they do not have a vote, and should not be allowed to control Congress nor the election process. The system is broken, but important players like Larry Summers don’t recognize this. The days of Ayn Rand inspired laissez-faire capitalism of Alan Greenspan and those that think like him are over. Lacking an amendment to the Constitution providing for a national initiative, voters must vote in progressives that will put corporations in their proper place.

  24. How would this agency interact with the panoply of other agencies that regulate the financial services industry? Since there is not discussion of this we can only assume it is not a serious gambit.

  25. Here we go. IMF, not World Bank:

    “Simon Johnson was Economic Counsellor and Director of the Research Department at the IMF from March 2007-August 2008.”


    Here’s a review (for me especially):


    Current(?) World Bank President Zoellick was on the board at Enron, and in addition to speaking German fluently, maintains close relations with Germany, and has received an award for his work with them.


    Here’s the fellow who seems to have SJ’s old job:


    Interesting that he is also affiliated with MIT (like SJ), who is good friends with Alfred Sloan.

    First managing director John Lipsky, was with JPMorgan, Chase, and Salomon Bros. Sits on the board of the organization, NBER, that guides most of the econ/finance-related research in this country.

  26. Reading the submissions, it appears that there are plenty of difficulties but still no stoppers?

    Maybe teeth for the protection agency could be:

    Product terms and conditions plus lender/borrower contracts to be submitted by lenders to the agency for approval. Unapproved products to remain legal contracts but unenforceable at law. This will definitely encourage lender organizations to ensure their products are approved.

    State administration may be the best route but this means out of state offerings may slip through the safety net? One national administration may be most cost effective, easiest to maintain and simplest to understand? We continue to progress beyond state borders as logical boundaries of financial dealing and requisite controls. Increasingly global practices will be of concern and national reach is most probably the minimum base for protective action.

    Encourage other countries to use this legislation as a model so that we can see global protection increasing? Countries refusing to approve complementary legislation may be ruled out contention for US business deals and offending deal contracts demed unenforceable. Mayb this is a day 2 item?

    Warning and information website; publish names etc of organizations and unauthorised products. Highlight individual protections and assistance available.

    Public awareness of committee etc action in legislation drafting and modification matters. Ease and assurance of borrower understanding and application plus cost/effective application to be strong considerations.

    Annual report to the nation enabling evaluation of
    legislative and agency effectiveness and fine tuniing required.

    Start witha priority list of sharp practices and borrower disaster trip points and progressively implement protections.

    This a quick dump of some thoughts and will need amplification and massive correction etc from the brains assembled via this blog. It would be really neat if something would come out of this and find its way in some form to the publication outfits such as the magazines/newspapers/internet news sites? A neural network product?

  27. Consumer protection agency for financial products? Great idea! Perhaps it can hire the fourteen million unemployed (or is it forty million)? Anyone who thinks this system can be fixed should read The Death of Money (1993). Investment is no longer possible, just gambling. Day traders get the best results, until they blow up.

  28. Now that’s (death of money) mighty sad Jake.

    Read a recent news item about some allegedly stolen/missing software which can manipulate the market. Maybe the recession recovery can be led by the owner franchising this program? Just think of 40 million market manipulators all profiting! I wonder if the original owner was/is operating a legal market manipulation?

    Seriously with money dead, what then is the shape of a successful economic recovery given that replication of the economy puts us back on the same slippery slope?

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