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Who's Afraid Of Consumer Financial Protection?

The debate over re-regulation of the financial sector has finally, and irreversibly, turned partisan. This helps define issues in ways that may be more familiar and thus easier to understand.

In the blue corner we have Treasury Secretary Tim Geithner. Secretary Geithner's overall banking policy continues to be problematic, and his broader re-regulation effort is hampered by all the free passes he gave to bank CEOs earlier this year. But on consumer protection he has the right message and he delivered it forcefully to Congress last week: we need a Consumer Financial Protection Agency (CFPA) and we need it now.

In the red corner, Representative Jeb Hensarling is rapidly emerging as a leader. A member of the Congressional Oversight Panel and the senior republican on the House Financial Services subcommittee on Financial Institutions and Consumer Credit, he wrote last week in the Washington Times that the CFPA is "Orwellian," because it would strip consumers of their rightful choices.

Mr. Hensarling seems dangerously close to slipping into double think.

He says that the House Republican "regulatory reform plan" will protect consumers. (This plan was not available for outside review when I enquired last week; if you have a copy that can be shared, please send it to me.) As far as I can see from his article--confirmed by what I heard before the House Financial Services Committee last week--the only tools they propose are those that have been tried and failed, repeatedly, in the recent past.

The key sentence in his op-ed may be, "If we act responsibly, whether the mortgage blows up on us is largely within our control." This ignores all the evidence that consumers were duped, misled, or otherwise fooled into financial products that they did not understand and could not afford.

Mr. Hensarling says that financial products are completely different from toasters, which are regulated by the Consumer Product Safety Commission, because "No one wants a toaster that will blow up, and whether it does is largely out of our control." But regulation over consumer durables was introduced and tightened over the years precisely because the "free market" produced items that were unsafe (at any speed, or any toaster setting).

Mr. Hensarling claims that consumer protection will be very much against the interest of smaller companies. There is no evidence to support this assertion--and it seems implausible. Many smaller businesses have been scammed by Big Finance in the past few years--either directly, through the products they were sold, or indirectly, through the higher tax bill we all face as a result of bailing out the big banks.

And the bad behavior of big banks is closely connected to how the financial sector has been allowed--and is still allowed--to treat consumers.

Yesterday, at last, a major commercial bank CEO broke ranks and articulately made the case against the actions and structure of Big Finance, specifically Goldman Sachs--see Robert Wilmers, head of M &T Bank, writing in the Washington Post. Hopefully, the finance lobby will more generally follow his lead--both in speaking out against the dangers of the biggest banks (and their "innovations") gone bad, as well as in favor of protecting valued consumers against outrageous scams. 

If consumers don't trust financial services--and why should they, given all we've seen?--this will be a long and painful recovery. Given what we know and have learned painfully about how our financial system operates, saying that "the market will provide consumer safety" is essentially the same thing as saying "the market will not provide"--you're on your own, again.

[Cross-posted at The Baseline Scenario.]