Monday, July 13, 2009

Is a New Consumer Financial Protection Agency REALLY the Solution?

On June 17, 2009, the White House released a proposal seeking to create the Consumer Financial Protection Agency, whose primary mission would be centralizing oversight and regulation of financial products – especially mortgages and credit cards.

Basically, the Obama Administration believes that if credit card and mortgage documentation were easier to decipher by consumers, the current financial tsunami could have been prevented. So the new agency's goal would be to overhaul the maze of paperwork into a one-page, easy-to-understand document.

Harvard Law School professor Elizabeth Warren, one of the new agency’s creators who is also the chairman of the Congressional Oversight Panel which oversees the Troubled Assets Relief Program – don’t you just love the way the government comes up with these names? – puts it this way:

Today, it’s not possible for a customer to compare three or four credit card
products to determine which one is the cheapest or which one poses the least
risk. This agency is about changing that.
Just as a reminder, I’m not a political commentator of any kind. This is a financial blog with a mission to educate readers and discuss tools and methods I believe will actually work. Of course, I still have my opinions about things, which is what I'm sharing here: my view.

This new agency is intended to simplify things. In my experience – and that of most people I come in contact with – the government doesn’t understand the concept of “simplify.” Ever received a letter from a government agency? Or been asked by a government office to complete a form? The bill that was sent to Congress on June 30, 2009, to create this agency whose goal is simplify things is 152 pages – but that may not mean a thing.

Regulators don’t always know the right answers. They are not superhuman – in fact, they're not always the sharpest knives in the drawer (hope I’m not in trouble here). Just look at the current mess we're experiencing and notice that, for the most part, the regulators missed all the signs. So to think that a new set of regulatory eyes will solve the problem once and for all is questionable, at best. It may work, but it's equally likely that it may not work.

Certainly there are people who were taken advantage of because of the complexity of the documentation involved. I say the perpetrators should be held liable to the fullest extent of the law. However, I often hear politicians quip that the financial meltdown was as a result of Wall Street’s greed. I humbly submit that they are misguided. The greed that caused our current economic situation ranged from Wall Street to Main Street to Every Street.

The truth is that the sorts of things buyers need to know about mortgages and credit cards in order to make smart, responsible decisions are not rocket science. It doesn't require a PhD to understand that buying a home with a 1 or 2 percent teaser interest rate that is scheduled to reset to 7 or 8 percent in a couple of years, or purchasing a $400,000 home on a $40,000 per year income, is dangerous and irresponsible. For my take on what actually happened with this housing crisis, read the blog I posted on February 9, 2009.

Usually, new regulatory agencies introduce new procedures and reporting requirements with which service providers – in this case mortgage bankers, credit card firms, etc. – must comply. This drives up the cost of doing business, and it's the consumers – you and I – who end up paying for it.

What REALLY Needs to Be Addressed

I contend that some people have a spending problem. They simply don’t know when to stop buying things they don’t need to impress people they usually don’t like with money they don’t have at interest rates that climb faster than their salaries. This new agency cannot save such people. I would like to recommend an agency called the “Consumer Spending Responsibility Agency,” which would have a goal of teaching financial responsibility, because frankly, that’s something we could really use.

The Answer Is Ethics and Morals – Not More Regulation

Do you think those unscrupulous folks who swindled consumers would not have done so if this agency had been in existence two or three years ago? And what about Bernie Madoff?

Actually, Madoff was once the Chairman of the Board of Directors of the NASD (now FINRA) which, interestingly enough, is a regulatory body in the securities industry; yet that didn't stop him from running a ponzi scheme, now did it?

In the midst of all the chaos, even as you are reading this, guess what? Some unethical people are duping others in various shapes and forms. No agency – no matter how large or simple – can stop that.


  1. Hell, we can't get CONGRESS to have ETHICS AND MORALS!!!

  2. Excellent Idea! However how would we get the people to attend the Consumer Spending Responsibility Seminars? Most people that have a spending problem or any problem at all for that mater don't even know it. If they do know it, it is sometimes very difficult for them to admit it to themselves. One must admit they have a problem before they can do anything to address it or remedy it!

  3. Donna,
    I agree. It is sad but absolutely true. However, instead of creating the false sense that the consumer is always right. And Wall Street is always to be blamed, may be, if the powers that be address both sides of the coin the awareness could be created.


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