In the July 11th edition of Bloomberg Businessweek, there was a feature on Elizabeth Warren, a controversial figure that is prominently mentioned in relation to the newly created Consumer Financial Protection Bureau (CFPB). This federal agency was established from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 which set new ground rules on financial institutions with the purpose of protecting consumers. It was thought that Dr. Warren would have been appointed by President Obama, but her candidacy is currently a tough sell for the Senate given her ideological philosophy.
In looking back on one of the primary reasons for our economic recession, most recognize that an unrestrained behavior that drove up housing prices to unsustainable levels caused our financial collapse. You have one group that blame predatory practices of bankers in seducing individuals to purchase homes without truly understanding the risk. Then on the other side, you have a segment that do not believe that the rest of America should be punished with additional regulatory costs based on the irresponsible actions of homeowners.
Elizabeth Warren resides in the first group. As a Harvard professor with an academic specialty on bankruptcy law, she began counseling banks on best practices in the credit card industry. In particular, she was concerned with credit card companies that lured customers with low interest rates, but masked hidden fees and other rate hikes that ended up trapping many Americans.
One of the most poignant points in the article was when she suggested that credit card companies adopt the equivalent of a “Good Housekeeping Seal of Approval” for banks that disclosed all of its costs and fees up front and not in fine print. Of course, her suggestion was ignored. First, it would hurt their business because consumers would be less likely to open a credit card once they knew the true cost. Second, they would be punished unfairly for disclosing all of their costs when their competitor hid them. Therefore, the only solution would be legislation requiring all credit card companies to disclose all of their costs.
While it is true that these new regulations would impose more costs on a struggling financial industry, there are benefits to a more transparent environment where individuals have a better understanding of the cost of credit. If armed with more information, then more Americans could be more aware of various financial products and avoid their pitfalls. Lastly, these requirements would not be much different than faced by food and phamaceutical distributors from the Food and Drug Administration (FDA) in informing customers on potentially hazardous items. We can also point to countries, such as Canada and Germany, whose strong regulations protected them from huge losses in residential real estate.
Critics of CFPB point to higher regulatory costs that would weaken the financial industry and stall our tepid recovery. With a new slew of regulatory requirements, there is concern of greater complexity and government oversight that will hamper efficient operations. If their cost burden rises, then this will affect their ability to boost jobs or negatively impact access to credit, which would affect overall economic activity.
The questions that citizens should be asking is this. Should we be vigilant in preventing the formation of another layer of bureaucracy which will hamper economic growth? Or should government take a more active role in protecting the U.S. public from experiencing another costly financial crisis arising from the hidden costs of accessing credit?
If you fear Elizabeth Warren as bankers do, then you will support current efforts aimed at preventing her ascension in heading CFPB. However if you believe the government should play a more active role in protecting the public from the dangers of credit, then there is no better person to head the agency than her.