Inside Financial Services

More Regulators Usually Means Worse Regulation

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Ugh. USA Today’s editorial board is just crazy about Elizabeth Warren’s CFPB:

For decades before the creation of the Consumer Financial Protection Bureau, consumers were the orphans in a federal regime set up to regulate financial institutions. Anyone with a credit card might remember the consequences.

Banks were allowed to raise credit card interest rates on existing balances at any time for any reason. Regulators did nothing to stop it until 2008. Charging sky-high fees when a consumer missed a payment deadline even by a few minutes? Also fine with regulators. Explaining the rules in language so incomprehensible that a financial wizard would be hard-pressed to figure them out? Ditto.

The full list is much longer, including a major contribution to the ruinous financial crisis of 2008, which was triggered by outrageous mortgage lending practices that never should have been permitted. You might remember the lenders’ TV commercials: No income? No assets? No problem.

A splintered collection of regulators just stood by and watched.

USA Today seems to be conflating the CARD Act (which imposes pricing and other restrictions on card lenders) with Dodd-Frank (which authorizes the CFPB), but let’s pretend the paper knows what it’s talking about, anyway. It’s still wrong. If, before the creation of the CFPB, the problem with federal oversight of financial services was that it consisted of a “splintered collection of regulators,” then how does it make sense to splinter that collection further by adding a new agency? It doesn’t. And prior to Dodd-Frank, banking consumers weren’t regulatory “orphans.” In theory, consumers had all sorts of government guardians who were supposedly keeping them safe: the OCC, the Fed, the FDIC, the OTS, state attorneys general, the . . . oh, I’ll stop there. And yet every one of these regulators fell down on the job. They all totally missed the financial industry’s greatest screw-up in a generation: the residential mortgage mess. Why anyone thinks the CFPB wouldn’t have missed it, too, is beyond me.

The mistake that boosters of the CFPB, such as USA Today’s editorial board, consistently make is that they assume that a change in regulatory structure-the creation of a new agency, say–must always improve regulatory effectiveness. But it won’t. Sometimes (probably, even) it will reduce effectiveness, by adding unneeded complexity and intra-agency turf-protecting. Have you seen the post-Dodd-Frank regulatory schematic Jamie Dimon included in several of his presentations over the past year? Take a look:

You don’t have to be a crazy conservative type like me to have serious doubts that a regulatory structure that convoluted is going to do an optimal job of safeguarding the financial system, protecting consumers, or both.

More likely, regulatory complexity and overreach often has the opposite effect it was supposed to. We’ve already seen how four regulators simultaneously let the mortgage crackup happen. And go back to the CARD Act for a moment, which the USA Today editorialists seem to think has been such a boon to consumers. Since the act was passed, average interest rates on credit cards have gone up, rewards programs have become stingier, and credit availability has shrunk in general. How’s that supposed to be good? Once the CFPB is up and running, you can count on the fact that it will have a similar effect on all kinds of consumer lending, from cards, to auto lending, to home mortgages. Wonderful.

Overall, the new regulatory system is going to be too complex and too intrusive at the same time. Likely result: it will do an even worse job at preventing disaster when the next crisis happens.

What do you think? Let me know!

6 Responses to “More Regulators Usually Means Worse Regulation”

  1. Josh Frank

    Tom Brown’s opinion piece contains “facts” about the impact of the CARD Act that are just plain wrong. Our research ( shows that since the CARD Act took effect interest rates are down and credit availabilty is way up. The new rules bring price clarity. As a hedge manager Mr. Brown knows that in the long run price transparency breeds competition, and that always lowers prices. Even the American Bankers Association says the new rules benefit consumers. Preventing consumers from being surprised by hidden fees and double-digit interest rate hikes—not to mention incomprehensible billing–improves financial stability. Rank-and-file consumers account for $7 of every $10 spent in the economy. Common sense rules of the road, for credit cards as for all financial services, helps prevent a repeat of the current crisis, where banks did whatever they wanted and left taxpayers to pay the tab. Common sense rule benefit taxpayers, shareholders and business alike.

  2. sheva1

    great Tom,
    bring back the usury laws and send them to jail.
    Cheerio !!!

  3. aha

    Just one thing to Mr Frank:
    Competition does NOT always lower prices, only most of the time.

  4. Jeffrey

    You are being ever so kind and genteel in your write up. After each crisis we get stronger and larger/more expensive regulators, concentrating on making sure the last disaster does not happen again. That is the problem that we have seen – as regulators grow bigger and more bureaucratic, they miss more by assuming that the other guys will find it. Do not forget that even the rating agencies went along for this housing ride, how did every one believe housing prices could only go up and that poor underwriting standards were OK? Look no further than directions from the government agencies, which pretty much controlled the market. How could OTS tell a thrift not to buy FNMA paper?

  5. Drew

    Hi Mr. Brown,

    Firstly a Big Thanks.

    If the rating agencies where privately owned, honest and not bought off they would have stopped the whole fiasco.
    However they are not.

    Corrupt Rating Agencies + Corrupt Federal Goverment (Barney Frank) + Corrupt Banks = Hell for consumers

    Not one single person or group has been charged with what I would call Financial Terror. No one will be charged either. The financial system here in the US are completely corrupt top to bottom.

    Even Warren Buffet did not give a dam about what Moody’s were doing. In the end folks it’s all about making money and getting reelected at any cost. There are no honest brokers, look at what Wharton & Harvard are producing.

    Good Luck

  6. Community Banker 35

    As a community banker for 35 years and watching consumer regulations mushroom out of control during this time, I must ask these basic questions…are consumers better informed today than 35 years ago…are consumers better protected than 35 years ago…my conclusion to both is no. For example, my wife and I recently closed on a cash out refi and it took us (I timed it) 30 minutes to just sign all the documents. Folks, I’m sorry, but the average person out there just can’t understand lawyer drafted disclosures on top of the shear number of them. Its was to complicated and in my humble view, COSTLY! All of these regulations over the years didn’t stop the mess we find ourselves in today. Simplicity (which means fewer attorneys), is what regulators should be striving to achieve. I’ve learned one simple rule of banking that should always be adhered to, the borrower must always have sufficient “skin in game” and sufficient capacity to repay. It seems to me that enforcing basic rules of lending would have prevented the mess. Lets go back to banking 101!

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