Waiting for the Big Push: Selling the Consumer Protection Agency for Financial Products

In mid-March, the administration proposed that toxic assets could and would be safely removed from banks balance sheets.  We were skeptical, and the the PPIP now seems to have slipped into irrelevance (loans; securities).  But the administration still put an impressive effort into persuading independent analysts, and broader public opinion, that they should do something clearly beneficial for banks.  This was “all hands on deck,” and it definitely had an impact on the debate, at least for a while.

Now, the administration’s major remaining initiative is its version of a Financial Product Safety Commission – something that would be clearly beneficial for the public.  And the skepticism – and outright opposition – comes from the banking sector.

How does the administration’s effort compare, then vs. now?

As far as I can see, they are not pushing this new consumer protection/safety agency hard enough.

Some sources claim that Secretary Geithner is fully on board with the Agency, and certainly he has mentioned it in public.  But there is no sign of the frenzied effort that accompanied efforts to launch the PPIP – when, for example, almost every economist in the administration seemed pressed into service to call potential critics and ask them to “give it a chance.”

One symptom of this “effort gap” is that counter-arguments and disinformation about the proposed agency begin to gain the upper hand.  One senior executive recently told me that this agency would have unprecedented powers to determine the decision of individual products – “something not even the FDA can do.”

Of course, this is nonsense.  The new agency would be powerful – and thus it is feared by the industry – and presumably it would be able to prevent sufficiently toxic products from being sold.  Hopefully, it will also be able to require that all financial institutions also offer some vanilla products, to make consumers’ choices easier.  But the idea that an agency would design the details of all products for any sector is both implausible and a malicious rumor being spread by opponents (actually, it reminds me of the pushback from meatpackers, and others, early in the 20th century).

If Treasury is so supportive of this new Agency, now is the time to launch public, high profile, and clever counterattacks.  By the time the legislation is being voted on, it will be too late.

And in this context, the administration should push hard on one of the great ironies here.  Financial sector executives like to stress the importance of “consumer confidence,” and they urge the government to take steps to restore this confidence (e.g., with a straight face, suggesting even more really cheap credit from the Fed to their favorite sector.)

But the same people completely reject the idea that consumers will feel more confident about financial products if there is finally some serious consumer protection around those products.  Whenever people learn – or just fear – that a particular food product is unsafe, they stop buying it.  When the stock market ripped people off in the late 1920s, it took legislation with real teeth to rebuild investor confidence – take a look at, for example, the Securities Exchange Act of 1934.  And the entire edifice of modern medicine is based on the idea that someone in government will make the call, right or wrong, on whether a compound can be regarded as a helpful drug – as opposed to colored water or something actually poisonous, which is what was sold as “patent medicine” 100-150 years ago.

If Treasury and the administration really wants a Consumer Protection/Safety Agency for finance, they need to kick their support campaign into much higher gear immediately.

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