The new Consumer Financial Protection Bureau is right around the corner Talk has now turned to who might run the powerful agency and what it might do. The WSJ names names:
Democratic leaders in Congress say their top pick for the post is Elizabeth Warren, the high-profile Harvard law professor and an outspoken critic of what she sees as a too-cozy relationship between government and bankers.
Other potential candidates include Michael Barr, a Treasury assistant secretary and University of Michigan law professor with a longstanding interest in consumer finance; Democratic state attorneys general Martha Coakley of Massachusetts, Lisa Madigan of Illinois and Lori Swanson of Minnesota; Susan Wachter of the University of Pennsylvania’s Wharton School, who served in the Clinton Department of Housing and Urban Development; and Nicolas Retsinas of Harvard’s Joint Center for Housing studies, a former bank regulator and a low-income housing specialist.
As David Evans and I have discussed, the blueprint for what was then the Consumer Financial Protection Agency was based in large part on using the insights of behavioral economics to design regulation in consumer credit markets. Advocates of behavioral law and economics have generally taken a dim view of consumer borrowing, arguing that consumers over-value current consumption and do not adequately account for the costs of repayment in the future. Policy proposals from this literature include a variety of prohibitions of consumer lending, including restrictions on subprime lending, payday lending, banning credit cards, unbundling the transacting and financing services offered by credit card companies, and usury laws.
The new Consumer Financial Protection Bureau is likely to follow this blueprint. Indeed, two of the top candidates to run the CFPB — Elizabeth Warren and Michael Barr — are law professors who were chief architects of what was then the CFPA. It is highly likely that the CFPB, like the proposed CFPA, will maintain its commitment to the behavioral approach to consumer borrowing, and use its significant powers to adopt regulations consistent with the view that consumers are systematically irrational when it comes to financial products and that the government would make better decisions for consumers for their own protection.
As I’ve pointed out with Evans (and again with Todd Zywicki), the behavioral advocates have not adequately made their case as a matter of economic theory or empirical evidence, nor have they sufficiently overcome concerns that the behavioral approach satisfies a careful cost-benefit analysis that accounts for the dynamic costs of dampening individual incentives to improve decision-making and regulator error.
I suspect that it is very important for advocates of the behavioral approach to regulating consumer borrowing that an “insider” be the first director of the powerful new agency. While the article suggests that Democratic leaders prefer Professor Warren, who would certainly fit the bill as one of the chief intellectual architects of this approach, I predict Professor Barr gets the nod.
I did find out part of the article refreshing: a frank admission from some consumer groups that the cost of credit will be likely to increase:
Some consumer advocates acknowledge that certain borrowers—particularly low-income consumers—are likely to find less credit available as products are regulated more closely than they were before. They maintain that modestly higher costs will be a worthwhile trade-off to thwart dangerous lending practices.
At least they are acknowledging some tradeoffs. Given the underlying assumption at the heart of the behavioral approach to consumer borrowing, on top of the patchwork of state level regulations layered on top of the CFPB, this outcome should be fairly obvious. But there are some who appear to believe that Congress can repeal the laws of supply and demand if they want it badly enough. But how large will the reduction in credit be? Who will bear it? What will the social costs of that reduction? And what will consumers get in exchange?
Here’s one opinion from the article:
“Credit is going to be a little more expensive,” said Prof. Engel of Suffolk University. “But I think most people in this country, having seen what happened to their pension funds and all of the external costs of risky lending, would be willing to take on paying a little bit more for credit to prevent this kind of crisis.”
If it were true that the CFPB-proponents really had compelling evidence that the sorts of regulations contemplated by Professors Warren, Barr and others would have prevented financial crisis, or even provide consumer benefits in excess of the costs, perhaps most people in the country should want to pay a little bit more for credit and we should willingly accept the reduction in access to credit (especially for traditionally disadvantaged groups with less access).
If it were true. But it isn’t.