Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: "big government" and "bureaucracy." Elizabeth Warren wrote an op-ed for Tuesday's Wall Street Journal that lays out the confrontation. For most of the past two decades, many Americans trusted the banking industry-not necessarily to be moral exemplars, but they trusted that the banks were basically doing what was right for customers and for the economy. Then in 2007-2008 that mood abruptly reversed, as it became apparent that unscrupulous mortgage lenders, the Wall Street banks that backed them, and the credit rating agencies had been ripping off mortgage borrowers on the one hand and investors on the other.
The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn't matter what customers think. How else do you explain, say, Citigroup's concocting a new credit card "feature" explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?
A year ago, it might have been possible to twist the banks' arms hard enough to get them to agree to new ways of doing business (such as a CFPA), because they needed government support so badly. Now it's too late. So the solution has to come from the other kind of arm-twisting-pressure from the president, the administration (that means you, Tim Geithner), and ordinary voters. If people feel screwed by the financial sector-and many of them should after the past decade-then they should want the CFPA.
But last month, Republican political consultant Frank Luntz wrote a memo laying out how Republicans could kill financial regulatory reform. "Ordinarily, calling for a new government program 'to protect consumers' would be extraordinary popular," he wrote. "But these are not ordinary times. The American people are not just saying 'no.' They are saying 'hell no' to more government agencies, more bureaucrats, and more legislation crafted by special interests." The goal is simple: to make Americans think that the CFPA is their enemy, because it's part of the government, and that the banks are nice cuddly ewoks by comparison.
This is absurd.
We like to make fun of government in this country, but really, what are you and a few of your buddies going to do to fight JPMorgan Chase on your own? For all of our beloved rugged individualism (and our individual right to handguns), it doesn't do much good when you're up against your credit card issuer. There is no Chicago-school free market solution to an oligopoly that, on top of all its other advantages, has an implicit government guarantee that gives it a major funding cost advantage over its competitors. One of the purposes of government is to protect ordinary people from forces (hurricanes, terrorists, monopolies) against which free market forces do not provide adequate protection. This is why we need a Consumer Financial Protection Agency. And this is what Frank Luntz wants to trick people into forgetting.
Cross-posted at The Baseline Scenario