I noted last week that my colleague (and Volokh Conspirator) Todd Zywicki and I had written an essay, published in a Fin Reg 21 Symposium on the Consumer Financial Protection Agency Act of 2009, on “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009.” The essay is now available on SSRN for interested readers (link above). Here is the abstract:
The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.
Another colleague and Volokh Conspirator, Ilya Somin argues here that political ignorance and cognitive biases exhibited by voters provide yet more reasons to object to the CFPA. Ilya’s second point, that political ignorance and voter irrationality make regulatory institutions more susceptible to regulatory capture, is an especially important one in this debate. Not to mention the frequently discussed problem of irrational regulators and judges. More generally, Ilya gives another reason to believe that the claim that consumer (and voter) irrationality counsels in favor of more regulation rather than less is both under-theorized and not supported by the existing evidence.