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Tuesday, June 07, 2011

Surowiecki: Warren as Head of the CFPB Would be Good for Banks

James Surowiecki argues that the appointment of Elizabeth Warren to head the Consumer Financial Protection Board "could actually be a boon" to the banking business:

The Warren Court, by James Surowiecki: Elizabeth Warren ... is ... working to set up the Consumer Financial Protection Bureau..., and in the past couple of weeks almost a quarter of a million people have signed an online petition asking President Obama to nominate her as the official boss of the agency. ... The banking lobby sees her as its nemesis, congressional Republicans are openly hostile to her... At this point, the only way Warren will run the C.F.P.B. is if President Obama makes her a recess appointment...
The core principle of Warren’s work is ... a cornerstone of economic theory: well-informed consumers make for vigorous competition and efficient markets. That idea is embodied in the design of the new agency, which focuses on improving the information that consumers get from banks and other financial institutions...
This would obviously be good for borrowers. But it would help most lenders, too. ... Countless lenders have gone out of business, and many of those still standing saw their stock price decimated after they loaned immense amounts of money to people who couldn’t repay it. The banks thought they were taking advantage of uninformed consumers, but they ended up playing themselves. In a more transparent credit market, almost everyone would have been better off.
While some bankers accept the need for consumer protection, they maintain that the C.F.P.B. will go too far and end up strangling financial innovation. But ... new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.” Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.

Correcting market failures doesn't strangle financial innovation.

I don't thnk she will be appointed, recess or otherwise. If not, it would be nice if the person who does get the job has her strong endorsement.

    Posted by on Tuesday, June 7, 2011 at 01:53 AM in Economics, Financial System, Regulation | Permalink  Comments (15)


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