During debate about the House version of the financial reform bill, Representative Melissa Bean was pilloried by progressives for her efforts to allow federal regulations created by the Consumer Financial Protection Agency to "preempt" stronger state standards. Essentially, this would mean that states, which were much better than the federal government at policing abuses in the housing market, would not be able to adjust to unique financial conditions in their state to strengthen protections again deceptive credit cards and abusive mortgages. Rep. Bean, who is a Democrat, was in fact repeating the line of the American Bankers Association whose president complained to Congress that without preemption:
we will have a patchwork of state, and even local, laws that will confuse consumers, greatly increase the cost of financial services, and serve as a strong disincentive to create new products of value to consumers...the removal of preemption will result in page after page of disclaimers and disclosures about all the differing state and local laws applicable.
The image of banks forced to produce page after page of disclosures hit home with Congress. Rep. Bean and her fellow travelers won a provision in the financial reform bill that essentially permits preemption. At the time, Mike Konczal of Rortybomb outlined four reasons this was bad for consumers: local regulators have knowledge of local problems; activists are more effective at the state level than the federal level; competition between the federal government and states favors the federal government, which preemption codifies; and the federal government is easier to corrupt. He concluded:
This is excellent business logic for large banks, as it forces through law a return to scale on their legal infrastructure. However, we don't make laws to benefit how profitable being large is to national banks...
However, tables have turned in the debate over health care regulation. The Wall Street Journal reports that negotiations have heated up about whether the final version of the health care reform bill should create a federal health insurance exchange (the marketplace where insurers will offer their health plans), as in the House bill, or permit states to create their own exchanges, as the Senate bill does. House Democrats want the federal regulator, but the insurance industry disagrees:
The insurance industry says states have a better handle on local conditions.
Of course, the insurance and financial services industries are different beasts, as are the regulators and regulations governing them. But this incongruity points out not only the fallacy of the financial services industry's argument against preemption (too many regulators in too many different places), but points out a fundamental weakness in the Senate bill.
Some consumer advocates were already concerned that the federal exchange created by the House version would substitute weaker federal regulation for state-level overseers who could keep a close eye on insurance company practices and plans. But the Senate bill's trick is to disguise weaker protections in state-controlled exchanges. The Senate bill requires state enactment of federal regulations and allows states to create their own reform program. Essentially, this makes federal law into a ceiling rather than a floor for health insurance regulations. In contrast, the House bill permits states to create their own exchanges only if they meet federal specifications.
Federal preemption is complex and not simply a contest between state and federal governments. But the battle is one that matters to industry greatly, and so should matter to consumers as well.
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