If we’d had the Consumer Financial Protection Bureau before the crisis…

Hey, Elizabeth Warren: You Built That. ;-) - promoted by david

In another enforcement action, the young Consumer Financial Protection Bureau is forcing Discover to refund $200 million to credit card customers due to deceptive marketing practices that tricked customers into signing up for services they didn’t realize would cost what they cost. Earlier this summer, the CFPB made Capital One refund $150 million to their customers for similar deceptive marketing.

One thing that occurs to me: If we’d had today’s CFPB in 2005 & 2006, they would’ve come down hard on the rampant fraudulent mortgage lending that was going on at the time, because that too was tricking millions of people into buying financial products using deceptive marketing. If we’d had the CFPB then, that would have put the brakes not only on the crazy mortgages, but on the deceptively-high rated junk derivatives Wall Street firms made out of those mortgages. It’s not necessary, I think, to give giant punitive fines to stop this behavior; if the CFPB consistently catches these companies and makes them refund the ill-earned money, it makes it more profitable for them to put their energy into making money through more honest pursuits, and that’s all we need.

Another thing occurs to me: Richard Cordray, head of the CFPB, was a recess appointment, and his term expires next year – the first year of the next Presidential term. Obama made a recess appointment specifically because Republicans opposed letting the CFPB have a director at all. It’s not that they opposed Richard Cordray specifically; they explicitly said they’d filibuster anyone nominated for the position. They’re committed to decentralizing and weakening the CFPB, if they can’t get it abolished altogether.

Remember what the Bush administration did to FEMA, and other government agencies they didn’t like or didn’t take seriously? At least those agencies had long enough histories that we could see their performance in those years as an aberration. But the CFPB will be just over two years old when Richard Cordray’s term expires. If Mitt Romney is president then, expect its reputation to be ruined before it really establishes itself, and before it has a long enough track record for people to see its real value.

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3 Comments . Leave a comment below.
  1. And over the shark we go

    And all of those “fraudulent” loans that victimized people had been avoided, the financial crisis would have happened anyway. Because fraudulent loans, made to people who didn’t understand what they were getting into, comprised only a small fraction of the problem.

    In other words, this entire post is myth. Like “Financial crisis caused by Community Reinvestment Act” myth. Not true, known not to be true, but sounds good for political purposes and people don’t understand this stuff, and reporters are lazy as shit, so what the heck?

    So glad we had Democrats in power from 2009-2011 to help not prevent a similar credit bubble from inflating in the future.

    • not so fast

      in your haste to debunk what you seem to have a very intense dislike for, you miss the point. By coming down on the banks for their loan practices, it would’ve slowed down the whole crazy-loan business, not just the subset of it that went to people who really didn’t know what they were getting into. Whether that would have prevented the entire financial crisis – a claim I didn’t make – is a different question. It certainly would have had a significant effect, but it’s harder to say how much or what would’ve happened. However, you seem to have a very knee-jerk intense antipathy to the whole idea that this would’ve mattered, so you ironically cast accusations of exaggeration while casting exaggerations of your own in a few directions.

      • Okay, I will back it down... but only a little

        A fundamental problem with purely ideological politics is the tendency to pound the square peg of reality into the round hold of what we already know to be true.

        Republicans: Financial crisis caused by too much regulation, especially the CRA, and government interference in the mortgage industry, through GSEs. Oh, and cheating poor people who refuse to pay their debts.

        Democrats: Financial crisis caused by deregulation, evil businesses, and “predatory” lending victimizing people by handing them huge sums of money that could never be recovered. And Wall Street bonuses.

        These things are myths, plain and simple, designed for base-rallying, but not for problem solving. I find that a good rule of thumb is if a proponent of a particular public policy already knows the solution before knowing what the problem is, that the solution is likely significantly comprised of snake oil.

        In reality, there were a huge number of factors– including elements of everything proposed by ideologues– that had a terrible synergy. At bottom, there was a “Brewster’s Millions” problem– a nearly incomprehensible sum of money, followed by another incomprehensible sum tomorrow, and then another, etc.– all chasing “safe” investments. For decades, residential mortgages were a relatively safe, low-yield investment.

        With more money to be lent than demand for borrowing, credit standards were loosened. And you know the dynamic: when standards loosen, people can borrow more, and thus pay more, so values started to climb. Why did standards loosen? In part, we had a huge trade deficit, and so investors across the globe needed somewhere to put their dollars.

        That created a feedback loop: the loans, and the bond funds that held them, were deemed low-risk, precisely because rising values ensured a full recovery even after a payment default by the borrower. If I lend you 150% of the value of your house today, and your house will double in value next year, then I can get everything back even if you never make a payment. The risk analysis, which seemed reasonable at the time (i.e., inside the bubble), thus fed the inflation that distorted the risk analysis. The distorted risk analysis fed the grossly mis-priced “insurance” against default in the derivatives market, accelerating the inflation of the bubble.

        Once the bubble was in place and inflating at an increasing pace, then (and really only then) can your various liberal bogeymen enter the picture to make money by making things worse. The Countrywide and Ameriquest hidden fees make no sense if the borrower can’t pay AND their house doesn’t increase in value by a sum sufficient to pay the fees. They Magnetar guys making deliberately high-risk portfolios in order to profit from the insurance only works if there is already a rapidly-inflating bubble. Yes, these things made the problem worse, but only in the sense that not wearing a seat belt makes a high speed collision worse. Even without it, it was still going to be a high speed collision.

        Ultimately, the factors that made what could have been a sector-specific slowdown into the train wreck we got were: (i) the extraordinary concentration of risk by investment bankers in nearly ALL banking institutions (the repeal of Glass-Steagal should here be regretted); and (ii) the “too-big-to-fail” phenomenon, by which the failure of any bank (Lehman Bros.) NECESSARILY causes the failure of many other banks, and the dominoes are tumbling.

        If banks are failing, then people can’t get car loans, and businesses cant borrow either (Argh, credit markets freezing up!) When businesses cant borrow, they can’t pay their expenses and so reduce expenses through layoffs and slowdowns, or they fail outright. Business slowdowns and failure cause other business slowdowns and failures. That’s what happened in 2009. That’s how the mortgage crisis became a general economic catastrophe.

        Unfortunately, Democrats had an opportunity to address these complex issues in 2009 and 2010, but chose to take a pass. There are no Republicans to blame about this.

        Instead, we got some vague hissing about evil Wall Street and their bonuses, and Dodd-Frank, which ignored the big systemic issues entirely, and more or less punted everything else by saying “ehh, let the regulator figure it out.”

        It did, however, create our beloved Consumer Protection Bureau, but we have no clue what that might do because there is nothing in the statute and the regulator hasn’t done anything yet. In all likelihood, it will be like other “consumer credit” statutes” and create another raft of paperwork that must be filled out in consumer credit transactions, but aren’t ever read. Another possibility is that it– like Prof. Warren sometimes seems to– will define “predatory” lending as equal to “high priced” lending, and thus close down the various high-cost lending that services the high risk (i.e., poor) borrower. If it chooses that path, then those borrowers, who will still require credit, will instead get it from truly predatory lenders that operate outside the legal system.

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Tue 25 Apr 8:21 PM