To me, the argument for an independent agency is that it would have a single focus. To me, the argument against an independent agency is that it would have a single focus. A single focus or goal leads to more extreme measures with adverse unintended consequences. Other agencies would have to deal with the fallout. Having consumer protection within another agency with a broader range of goals, such as the Fed, for example, would yield more balanced and less disruptive outcomes.
Consumer Protection Agency Inside the Fed
This idea, in the Dodd bill, was reportedly a “compromise” made by Senator Dodd to gain Republican support. The agency would be housed inside the Fed, but not report to the Fed. It would be independent. The Fed would finance its expenditures out of its budget.
This makes no sense. It makes the Fed a landlord and a sugardaddy. I can’t think of any advantages to making the Fed the agency’s landlord if it has no say in consumer protection. Having the Fed pay its bills is a very dangerous precedent.
The Fed has traditionally turned over approximately 90 percent of its earnings to the Treasury’s general fund. Decisions on how to spend that money are made like all other spending decisions—through the Congressional appropriations process. Directing Fed earnings to a favored agency prior to the distribution to the Treasury is allocating those revenues outside the Congressional processes and the checks and balances those processes entail.
It’s tempting to say that we don’t need more formal consumer protection than we have, but it may be possible that such an agency would have identified the enormous moral hazard involved in the making and securitization of subprime mortgages and blown the whistle on it.
Way back when, I recall occasional references to “predatory lending.” The way it was described to me—not in any official capacity—made me very skeptical since my first question was never answered satisfactorily: why would a lender make a loan where he didn’t expect to be repaid? I didn’t see any motivation. No-one ever answered my question by pointing to the securitization of such loans and their sale to others. Those dots were just not connected, as unlikely as that sounds in retrospect. I guess I and everyone else—except the characters in Michael Lewis’s really good book, The Big Short—were blind in one eye and couldn’t see out of the other.
Anyway, leave consumer protection with the Fed, with stronger mandates if necessary, or make it separate. Just don’t engage in the sham of making the Fed a landlord and sugar daddy.