Judge Posner on Financial Reform and the Consumer Financial Protection Bureau

Josh Wright —  30 June 2010

Judge Posner offers his thoughts on financial reform, mostly negative, at Bloomberg.   The thrust of the essay is that the financial regulation produced by the political process has, at best, a poor nexus to the actual causes of the economic crisis, and that what we are left with is primary reorganization and reshuffling to look busy.  Judge Posner discusses the political advantages to reshuffling as a response to government failure:

Reorganization is a favorite response to a governmental failure because it is visible, easily explainable, and can be done without ruffling too many feathers among interest groups and bureaucrats. It also buys time, since no one expects such reshuffling to be effective immediately.The new financial overhaul bill is about 2,300 pages long, and though they are pages of large print and broad margins, I defy any single person to claim to have read and understood it all. So far as I can judge, though, much that the bill ordains is within the existing powers of the financial regulatory agencies and is therefore superfluous.

Posner also takes aim at the consumer protection aspects of the bill.  As I’ve noted with David Evans and again with Todd Zywicki, the consumer protection-related aspects of the legislation have always been troubling on substantive grounds and include substantial risk of a reduction in consumer access to credit.  Posner focuses here instead, as he does throughout the essay, on the redundancies of the bill.  For example, of locating the consumer protection arm in the Federal Reserve instead of the Federal Trade Commission (a solution I’ve supported), Posner writes:

A consumer-protection bureau lodged in the Federal Reserve? The Fed already has such a unit. It is ineffectual because the Fed cares about the solvency of banks, not the solvency of their customers. Congress proposes to cure this skew by making the head of the Fed’s consumer protection staff — renamed the Consumer Financial Protection Board, since renaming is the least arduous and hence an irresistible form of reorganization — a presidential appointee, which will create friction with the Fed’s chairman, who might (because he has a fixed term) be a holdover from a previous administration. …

The Federal Trade Commission already has extensive experience in consumer protection and could be given additional resources to police unfair and deceptive practices in mortgage and other consumer lending. If, as some students of finance infer from the extraordinary interest rates that people pay for credit-card debt and other forms of fringe banking, it’s true that Americans simply can’t handle debt responsibly, the only solution is to reinstate usury laws.

Posner’s op-ed is available here.