Protecting Citizens

In the aftermath of the 2007–08 financial collapse and the federal government’s subsequent rescue of banks deemed “too big to fail,” a significant majority of Americans supported stricter federal regulation of the financial industry.

One of the signal achievements of President Barack Obama and the Democrats who controlled Congress from 2008 to 2010 was the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law was criticized by many for being too timid, especially in not breaking up large banks whose potential mismanagement and failure might again pose a systemic threat to the nation’s financial infrastructure. At the same time, almost every aspect of the bill was vigorously opposed by the banking industry and all but a handful of Republicans. Opponents refused to acknowledge that lax regulation—indeed the deregulation of the banking industry carried out by both parties over the previous three decades—had created the conditions that led to the banks’ reckless risk-taking.

The new Republican majority in the House is now seeking ways to repeal the Dodd-Frank Act, rewrite its provisions, or defund the agencies and mechanisms needed to implement it. As always, the complaint is that “excessive” regulation will impede capital formation and investment, slowing economic growth and job creation. Those who believe “the market” always knows best would do well to remember that federal regulation of the financial sector in the aftermath of the Great Depression created a stable banking system that contributed to decades of economic prosperity, along with an unprecedented rise in middle-class incomes. Proponents of the unfettered market must not forget that without massive government intervention the entire financial system would have collapsed in 2008.

The U.S. government faces few challenges more important than renewing people’s trust in the honesty and fairness of our financial institutions and economic system. The Dodd-Frank Act established a number of important regulatory measures toward that end. These include bringing greater transparency and accountability to the “derivatives” market (one of the sources of the financial collapse), clarifying the federal government’s legal authority to deal with failing financial institutions, requiring private hedge funds to register with the Securities and Exchange Commission, establishing the Financial Stability Oversight Council to assess possible threats to the system, and—perhaps most promising of all—creating the Consumer Financial Protection Bureau. Among the CFPB’s tasks is ensuring that Americans are being told the whole truth about mortgages, credit cards, and other financial products sold by banks. Not surprisingly, banks have launched a sustained attack against the new bureau, and against Elizabeth Warren, the Harvard law professor and consumer advocate chosen by Obama to get the agency off the ground.

Warren is a well-known and outspoken critic of Wall Street, having made a name for herself chairing the Congressional Oversight Panel that investigated the bank bailouts. Many would like to see Obama nominate her as the first director of CFPB, a position that requires Senate approval. Republicans have made no secret of their plans to filibuster should Warren be nominated, and they have launched several preemptive efforts to discredit her, none of which has gained traction. Warren handled herself well before a House committee where Republicans roundly denounced both her and the allegedly “unchecked” authority of the new consumer-protection bureau. Politically, the battle to win Senate confirmation for Warren would be brutal, and the outcome uncertain. Obama has often shied away from such fights, reasoning that little is to be gained from high-profile partisan brawls, especially if the nomination is doomed from the beginning.

 The president should think again. Americans remain angry and suspicious about how the bank bailouts were handled. Greater regulation of financial institutions remains a popular issue. Bankers are once again reaping enormous profits while millions of Americans continue to struggle with unemployment, high levels of debt, mortgage foreclosures, and anemic economic growth—all consequences of the financial crisis. Nevertheless, Republicans seem determined to do everything in their power to make the Dodd-Frank Act a dead letter. This is a debate that needs to be engaged, not finessed. Protecting citizens from the depredations of the market and from those who know how to manipulate it is good politics as well as good policy. A crucial step toward reaching that goal would be an effective Consumer Financial Protection Bureau. There are many reasons to believe that Elizabeth Warren is the right person to direct the new regulatory agency. And the nation as a whole would benefit from a Senate hearing in which the case for greater transparency in the banking system is put forward by an unapologetic advocate for the consumer rights of every citizen.

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