Analysis of the Supreme Court's last decisions of the term and the impact of a vacant seat on the bench.
The Consumer Financial Protection Bureau has been under assault almost from the moment it was put on the drawing board. The battle lines are familiar. Democrats versus Republicans. Yesterday a GOP-led House subcommittee approved three bills that would change the agency’s structure. Republican critics said the measures would improve the CFPB, partly by making it more transparent. CFPB supporters blasted the bills as an attempt to cripple the bureau, which the banking industry has lobbied hard against. The continuing fight over the new watchdog of banks, credit card companies, the mortgage industry and other consumer lenders.
- Mark Calabria director of financial regulation studies, Cato Institute.
- Maya Jackson Randall financial reporter, Dow Jones Newswires, Wall Street Journal bureau.
- Travis Plunkett legislative director, the Consumer Federation of America.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The creation of the Consumer Financial Protection Bureau was mandated last summer by the Dodd-Frank Wall Street Reform law. It's a central piece of the Obama administration's overhaul of financial industry regulations. The consumer bureau took a hit from Republican lawmakers yesterday. We'll talk about those and the background. Joining me here in the studio to talk about the fate of the Consumer Financial Protection Bureau, otherwise shortly known as the CFPB, Travis Plunkett of the Consumer Federation of America, Maya Randall Jackson of Dow Jones Newswires and Mark Calabria of the Cato Institute.
MS. DIANE REHMWe, of course, do welcome your calls, questions. Join us on 800-433-8850. Send us your email to firstname.lastname@example.org. Maya, let me start with you. Tell us what the Consumer Financial Protection Bureau was designed to do and why it was even thought of.
MS. MAYA JACKSON RANDALLWell, it's a new bureau designed to root out abusive practices in financial markets, abusive practices dealing with credit cards, mortgages and other services. And a lot of consumer advocates didn't think that the Federal Reserve and the current agencies did an appropriate job in protecting consumers before the run-up to the financial crisis, and so through Dodd-Frank, the new Consumer Financial Protection Bureau was created. It has broad powers over giant banks, as well as thousands of payday loan firms, check-cashing companies, a lot of firms that did not have federal regulation currently. So it's a brand-new agency. And a lot of consumer advocates fought hard for it. And so that's why the current battle is pretty interesting.
REHMTell me about the current battle and the three bills that the House subcommittee introduced yesterday.
RANDALLThe Republican-led House has looked at the Consumer Financial Protection Bureau and has promised vigorous oversight of the bureau. They're not happy with a lot of the powers that the bureau has. The three bills that a subcommittee voted on yesterday would restructure the consumer bureau. So, one, it would make it easier to veto the bureau's authority, the bureau's actions. Another one would change the consumer bureau into a commission, so instead of a single director, you'd have a five-person bipartisan commission. And then a third bill would make it so the transfer date or the so-called start date of bureau, which is July 21, would be put off until there is a director in place. And, currently, there is no director.
REHMMaya Jackson Randall, she is financial reporter for Dow Jones Newswires at The Wall Street Journal bureau. Mark Calabria, what are the objections to the Consumer Financial Protection Bureau?
MR. MARK CALABRIAWell, there are a number of objections. I first want to sort of take some issue with (unintelligible) as a hit. I think these bills actually increase the integrity and increase the oversight and strengthen this agency. And I'll be very straightforward. I'm not a fan of the agency. I prefer it went away. But I think that agencies should be accountable, and they should have debate. I mean, you have an agency, particularly an independent agency, that has a single person running it. You really don't get that back and forth. We have a number of agencies like the Securities and Exchange Commission or the CFTC, which is the Commodity Futures Trading Commission, that are all boards.
MR. MARK CALABRIAAnd the agency that this agency was actually designed on, the Consumer Product Safety Commission, is itself a board that is subject to the appropriations process. So, unfortunately, there's a number of issues that have gotten entangled together. And I think they're issues about good government and what any agency should look like regardless of its function along with the function. So, unfortunately in Washington, there's just attitude sometimes that if you're in favor of something, that that means you should be against any constraints on it. You know, to me, I think what a good design for an agency, again, is irregardless of what the function of that agency should be. So we should have accountability there in general.
MR. MARK CALABRIANow, of course, there are a number of objections. Some of them are, of course, to that -- the powers that the agency has. And it's worth noting that none of these three bills actually change the underlying powers of the agency. They simply change the oversight of the agency. Of course, there's a long-going debate about the contrast intentions between sometimes safety and soundness in the banking industry and consumer protection, or if you want to call it consumer protection.
MR. MARK CALABRIAI think those are important things. I, myself, and, I think, I probably speak for certainly more than just myself, saying I'm tired of all the bank bailouts. I'm tired of risk to safety and soundness. So I know that some of my friends would say that bank regulators did not take safety and soundness seriously when we've had over 300 or something banks bailed. I would make the argument they didn't take safety and soundness seriously enough.
REHMAnd wouldn't this agency do exactly that?
CALABRIAOne would hope so. But I think that the history of consumer finance -- and, I think, probably something we all agree on -- is that the history of consumer finance in America is not necessarily been one we'd be proud of. After the last bubble in the early -- late '80s, early '90, what did we do? We passed a bunch of consumer finance laws. It's hard to see that those made a difference at all in the most previous bubble. So I'm certainly the first one who would say, we need to completely reform our system of consumer finance. I don't believe this agency does it. I believe the agency simply takes the broken system we have now, cobbles it all together.
CALABRIAFor instance, if you believe that the Federal Reserve fell down on the job in terms of consumer finance, then why did you take all of the staff from the Consumer Finance Agency and the Federal Reserve and put them in this new agency? These are all the same employees who apparently failed before. Are they going to do a better job this time?
REHMMark Calabria, he's director of financial regulation studies at Cato Institute. Travis Plunkett, where is all the objection focused? Is it on the bureau itself? Is it on Elizabeth Warren, who has been tapped to head the agency, at least for the time being? Where is all of it coming from?
MR. TRAVIS PLUNKETTWell, it's coming from the same community that opposed the creation of the bureau in the beginning, and that is the big banks and large financial firms. They didn't want to reform a system that worked quite well for them but not for the public and not for the economy. So they object to the structure of the bureau. They object to the fact that the bureau will have power to address consumer protection instead of the seven agencies that existed before when consumer protection fell through the cracks. And they object to Elizabeth Warren, who has been very articulate and very vigorous in trying to get this new agency up and running and fulfilling its mission. So it's both.
REHMHow effective do you believe this new agency could be? Or would it simply add to Washington's bureaucracy?
PLUNKETTWell, it's important to note that this does not layer on new bureaucracy. Congress actually did something they rarely do. They took power away from existing federal regulators. Mark alluded to this. The Federal Reserve no longer has power to write rules on consumer protection. A little known but very powerful federal agency called the Office of the Comptroller of the Currency no longer has power to regulate consumer protection when it comes to mortgage loans or credit cards. They didn't layer on new bureaucracy. They took it away, and they consolidated it.
PLUNKETTThat's because consumer protection fell through the cracks. We had seven agencies, none of whom paid attention to consumer protection. So the potential is very great if Congress doesn't succeed in handcuffing the new agency, and that's what these three bills, that you're talking about today, would do.
REHMTravis Plunkett of the Consumer Federation of America. Do join us, 800-433-8850. Send us your email to email@example.com. Maya, Congresswoman Carolyn Maloney, the subcommittee's top Democrat, introduced an amendment yesterday. Tell us about that.
RANDALLThat amendment was interesting. It would basically ensure that Elizabeth Warren would be head of whatever commission would be created. So if this Republican bill made it through Congress and there were a commission instead of a director at the bureau, the way that the amendment was written, it would have to be -- Warren would have to be chair of the commission.
REHMTell me why so many people on -- who were opposed to this agency object to Elizabeth Warren.
RANDALLI think, initially, there were a lot of objections from the industry. People thought that she was more of a radical individual, a consumer advocate that might not fully understand the financial industry and their -- just the profit, the way that banks are run, the way that they operate. And so I think she sparked a lot of fear among companies and people in the industry that she would take -- use these broad powers at the bureau and make decisions that could hurt profits, that could hurt -- that could limit choices that companies can make. And so there's been a lot of angst about Elizabeth Warren.
PLUNKETTIt should be noted, though, that...
PLUNKETT...bankers are warming up to her because they've realized that she does understand their business, that she's a good listener and that she has no intention of making life more difficult for the small banks in particular. So two days ago, they had a very powerful trade association in Washington. The Independent Community Bankers said that he thought that she -- he didn't endorse her, but he thought that she was doing a very good job, was listening very well to the needs of small community banks, most of whom weren't involved in creating this crisis, and could potentially do a good job.
CALABRIAA couple of points. First of all, I mean, I'm somebody who absolutely believes in the rule of law, and it needs to be important that our agencies in our government should not matter what somebody had for lunch that day. You should have the same set of regulations, regardless who's running it. And I think it's been a mistake to make the argument about Elizabeth Warren. This is about the agency. If you were nominating me for the agency, I would still say it has to be a board. So I think accountability's an important part of this.
CALABRIAI also want to address what, I think, is largely a canard. While the banks have problems with it, there are a number of people who, very legitimately -- I mean, for instance, the opposition to the agency in the Senate was Sen. Shelby, who only a number of years ago was given the Legislator of the Year award by Travis' organization. Travis knows that Sen. Shelby is not a show for the banks. He knows that I'm not a show for the banks.
PLUNKETTTrue. Absolutely true. Sen. Shelby has been out front on some important consumer issues like credit reporting, and Mark is a reasonable guy. That doesn't mean these bills, though, won't handcuff the agency.
REHMTravis Plunkett of the Consumer Federation of America. Short break. We'll be right back.
REHMAnd here's an email from Abby, who says, "To your guest who expressed concern that the same employees who failed, could he speak to the difference in mission and goals of the agency with a change in focus from corporate to consumer concerns? Perhaps give those employees the tools they need to be effective advocates, something they could not do at the Fed."
CALABRIAMy reaction to that is -- I mean, that's a very good question. And certainly the argument behind the agency is that if we set up something different, there will be different incentives. I think that remains to be seen. I mean, certainly same employees brought the same perspective to it. I don't believe that the Fed necessarily failed on the job of consumer protection. I mean, I absolutely believe they failed on the job when it comes to monetary policy, but that's a different issue.
CALABRIASo I do think the argument that somehow these agencies were not taking consumer protection seriously, you know, was not part of it. And, of course, there was no contribution to the crisis from things like payday lenders and check cashers who were not under federal supervision before.
REHMGo ahead, Travis.
PLUNKETTWell, two things. First, I think most Americans would completely disagree. The Fed blew it when it came to subprime mortgage loans. They had authority, starting in 1994, to deal with it, and they ignored it until it was too late. Second, it is absolutely not the case that many of the senior employees in particular who were involved in those failures are coming over to the Consumer Financial Protection Bureau. In fact, some lower-level staff will be going over there, the top leadership, none of whom were involved in those debacles.
REHMAll right. Let's hear what Elizabeth Warren had to say to Stephen Colbert on May 3, 2010.
REHMAgree with that, Travis Plunkett?
PLUNKETTWell, she's absolutely correct that in terms of the emperor having no clothes, so to speak, that consumer protection has been an abject failure in recent years at the federal level. It's important to note that accountability was an issue here. I mentioned those seven agencies. I mentioned that all of them had a little bit of responsibility, but none of them made it a priority when it came to consumer protection. That's why a single director who's completely accountable, both to Congress and the president and the American people, is important. If they mess up, there will be no excuses.
REHMAnd joining us now by phone is Massachusetts Democratic Congressman Barney Frank. Good morning to you, sir.
REP. BARNEY FRANKGood morning, Diane.
REHMTalk about how important you see the Consumer Financial Protection Bureau to be for people in this country.
FRANKIt has two very, very clear signs of importance. In the first place, the suggestion that consumer-related problems weren't part of the lead-up to the crisis couldn't be more wrong. Inappropriately granted mortgages were both a consumer abuse and a systemic problem. And Travis Plunkett just gave you the basic facts. In 1994, Congress passed the Homeowners Equity Protection Act, and it empowered the Federal Reserve to regulate mortgages and to regulate them, by the way, whether they were issued by regulated entities called banks or the unregulated mortgage lenders that were doing it.
FRANKAnd Alan Greenspan, as a matter of ideology, refused to use it. There were people on the Federal Reserve, one in particular, who said we should do this, and he refused to do it. In addition, the control of the currency -- and this was a Clinton appointee -- hold on, let's make this a similar bipartisan -- named John Hawke. He used federal powers to preempt all of the state consumer protection laws that applied to national banks. Literally, if you were a national bank, no state law trying to protect consumers could apply, whether or not it was found to be inconsistent or an interference.
FRANKAnd we had -- Congress had given the Federal Reserve the power to promulgate a code which could be used to protect consumers. The Federal Reserve refused to do it. So there was a clear conscious refusal by the bank regulators to do it because, frankly, their main job was bank regulation as they saw it, and they had this relationship to the banks. And consumer protection was, at best, a second thought, and sometimes not thought of at all. We had hearings on this issue. And I asked, for instance, the general council to the Federal Reserve how many meetings he could remember consumers who's being discussed that -- I think like one over many, many years.
REHMAll right. So now is the Consumer Financial Protection Bureau's existence at risk?
FRANKIts ability to function effectively is at risk. The Republicans understand that consumer protection is popular -- ending credit card abusers, ending bad mortgages, et cetera. So they don't want to make a frontal assault on it, but they have a series of measures which, taken together, would make it impossible to work. In the budget debate, the first budget debate this year, they cut its funding very substantially. Now, the president and the Senate pushed back, and we got that restricted. But they tried to do that.
FRANKSecondly, they want to give the bank regulators -- that's what you heard Elizabeth Warren just telling Stephen Colbert. They want to give the very bank regulators who had failed to use their powers to protect consumers the right to override by a majority vote of these regulators, who would almost be unanimous in any case on the other side to cancel any consumer regulation. We do say that two-thirds of those regulators, if they think a consumer protection agency is going to endanger the stability of the financial system to step in. Now, we don't foresee that happening.
FRANKBut it was one of these horrible scenarios they raised. We said, fine. We'll make sure that can't happen. So they also want to say instead of a single director, have a five-member commission. All five would have to be confirmed by the Senate. And the way the confirmation process is working now, it obviously wouldn't function. And it's because, in part, they're afraid of Elizabeth Warren. Mr. Bachus, who's the chairman, the Republican chairman of the committee, told the bankers -- I think from Alabama, his own state -- oh, this is not about Elizabeth Warren. And then he immediately said, oh, but, of course, I wouldn't take a lie detector test to prove it.
REHMAll right. And I want to let listeners know we have invited Congressman Spencer Bachus of Alabama to join us this morning. We hope he'll take us up on our invitation. Finally, Congressman Frank, tell us what's going on with regard to regulation of the derivatives market.
FRANKOkay. Now, Mr. Bachus may be afraid doing -- give him a lie detector test, Diane, so you're going to have to promise him to do that.
FRANKOn derivatives, again, we are talking about something which has been a problem for individuals, what was clearly a major economic crisis. AIG was one of the precipitating instances of the crisis when the Federal Reserve, without any congressional involvement, lent them $80-plus billion because AIG had gotten itself committed to other financial institutions like Goldman Sachs and others to pay off something called credit default swaps. Credit default swaps means that AIG was ensuring the value of mortgage-backed securities that these other financial companies had bought.
FRANKThen when the price of housing went down because mortgages were given to the people who shouldn't have gotten them because the Fed wouldn't prevent that and all these regulatory failures reinforced each other, AIG suddenly found itself forced to pay over nearly $200 million that they didn't have. And that threatened the whole crisis. What we said was, look, if you're an airline and you need a hedge against an increase in fuel prices, we don't do anything to restrain you.
FRANKBut if you are a financial institution, AIG, engaging in credit default swap razzle-dazzle, frankly, with Goldman Sachs and we say, if you're going to do that, you're going to have to have capital behind it, you can't engage in the kind of transactions that are going to leave you high and dry if you can't pay off. And that was -- that's a very important safety measure.
FRANKYou also specifically gave the Commodity Futures Trading Commission the power to set position limits, the power to deal with speculation. And there wasn't any question but that speculation by people, not in the oil business, financial companies, is helping drive up oil prices. It's not the major reason, but it's a contributing factor.
FRANKThe Republican -- let me just finish, like, for one second...
REHMOkay. All right.
FRANKI apologize. But the Republicans have a bill pending now that they want to bring up in committee next week that will be fighting to say that between now and December of 2012 -- by which time they hope to have won the presidential election -- nothing to regulate derivatives can go into effect, no restriction on what AIG and Goldman Sachs did. And, outrageously, there's a rule pending now at the Commodity Futures Trading Commission that would allow them to step in and restrain speculation, tell people you can't buy up all those oil futures in the way that would drive up prices. And they would make that impossible to go into effect for a year-and-a-half.
REHMAnd you're saying that this is going to happen next week?
FRANKWe will be voting in committee a week from today. And the agriculture committee -- this legislation goes to both committees. The agriculture committee voted on it yesterday and voted it through, and we will be fighting it next week.
REHMAll right, sir. Thank you so much for joining us, Massachusetts Democratic Congressman Barney Frank.
FRANKThank you, Diane.
REHMThank you. And turning to you now, Mark Calabria, what's your reaction to the congressman's comments?
CALABRIAThere were certainly a lot there. I guess I should say, any time somebody says there's no question, that's the first red flag in my mind, that there are actually lots of questions. We could have an hour-long discussion on the 1994 HOPA Act. I've read that section repeatedly. I simply don't see how you could get to, it doesn't bar irresponsible lending, it only bars unfair and deceptive. And so, for instance, getting somebody into a loan with no down payment is neither unfair or deceptive, but it's pretty irresponsible and pretty dangerous. But that's a conversation that we could debate for hours.
CALABRIAI think legitimate people could read that -- I do want to comment quickly on -- the part that the congressman leaves out on derivatives is by pushing all of these derivatives on the clearing houses, and the Dodd-Frank bill, for the first time, creates an opportunity where clearinghouses can be bailed out by the Federal Reserve. We created new too-big-to fail institutions that the taxpayer is on the hook for that were not on the hook for beforehand.
PLUNKETTWell, on those mortgage loans, I'd just say that most of them were unfair and deceptive. And had the Fed acted, they could have stopped a lot of that abusive lending because these lenders were not telling consumers the truth about the real cost of those loans. Often, those loans would increase sharply in price after a year or two, and the brokers and the lenders were misleading consumers about real cost. That's why they couldn't afford them.
REHMAnd turning to you, Maya Jackson Randall. Are Republicans and bankers literally afraid of Elizabeth Warren?
RANDALLI'm not sure if they're afraid of her or if there's been a caricature of her out there. I think that, you know, a lot in the financial industry, a lot of bankers did not want the bureau created. So, I mean, whether it's Elizabeth Warren or someone else, you know, they're concerned about the powers in one individual. And so, yes, they're concerned about Warren in the past, what she said about Wall Street, about banks, so I think it's a little bit of both. It's, you know -- they're concerned about Elizabeth Warren, but they're also concerned about the bureau.
REHMAnd you're listening to "The Diane Rehm Show." Finally, before we take a break, let's hear what Elizabeth Warren had to say on Jon Stewart's program last week, April 26.
REHMTravis, do you agree with that characterization?
PLUNKETTWell, that's exactly what the bills would do. And the last bill she mentioned would -- it's been introduced in the Senate, would completely repeal financial reform. We call it the Dodd-Frank Act. And so, even Sen. Shelby, who Mark mentioned has been quite good on some consumer issues, has endorsed that bill. In fact, every member of the Senate banking committee, where a nomination for the director would start -- save one -- hasn't -- has signed on to that bill. So this is an example of what Maya was just saying. It's not just about Elizabeth Warren. It's about the agency and the power of the agency. Anybody who wants to really fulfill the mission of the agency is going to have a difficult time when so many members of the Senate want to completely repeal financial reform.
REHMI do want to repeat, since you've heard Congressman Barney Frank, we did invite Congressman Spencer Bachus of Alabama to join us. He's chair of the House Financial Services Committee. Our producer, Denise Couture, in fact, called several Republican members of Congress, all of whom declined our invitation to be on this morning. I want to turn to you, Mark Calabria, and get your reaction to Elizabeth Warren's statement.
CALABRIAI mean, certainly, factually, there are people who have bills out there to repeal Dodd-Frank, which I actually think it should be. I mean, the need -- the biggest bait and switch ever put upon the American public...
CALABRIABecause it's not going to do anything to actually address the causes of the financial crisis.
REHMHow do you know that?
CALABRIABecause I've looked at the bill. I've studied the financial crisis. I can guarantee you that we will have the financial crisis to stay in the next 20 years, and Dodd-Frank would have done nothing to stop it. And this is what frustrates me the most. We have a flawed and broken financial system. Congress has sold the American public on a bill...
REHMSo what kinds of restraints would you like to see in place?
CALABRIAFirst of all, we need to look at this, that -- what was the cause of the financial crisis? Now, my friends, Travis, will say it's predatory lending, but if it's predatory lending, why did we see a same boom and bust in, say, the commercial office market or the apartment market, where apparently all these people buying office loans duped? You saw very same bubbles across assets that suggest there's got to be a common cause, and it wasn't prepayment penalties.
CALABRIASo what are we looking at as a common cause? What drives up asset prices, monetary policy, global flows of capital in this country? We aren't here today because capital and interest rates and loans were too expensive. We are here because they were too cheap.
PLUNKETTWell, predatory lending wasn't the only cause, but it was the spark that lit the housing crisis, which, because of a number of flaws in our securities markets, eventually spread to a economic crisis. So it was an important, very significant factor.
RANDALLI mean, I think it's both. I think, you know, you have experts who point to monetary policy and you have experts that also point to the foreclosure crisis and say that, you know, there are a lot of things that need to be fixed to help, especially lower-income borrowers, troubled borrowers. So, I mean, I think, you know, there are a lot of things that could be addressed. You know, I can't say what Dodd-Frank will do, but, you know, there are interesting sides on both sides.
REHMThere are those within the American public who really support a consumer financial protection agency. What do you say to them, that this would simply not do any good?
RANDALLI don't -- I think they're waiting, and I think some of the consumer groups are trying to point out to the American public that this bureau is under -- at risk of being restructured.
REHMMaya Jackson Randall, financial reporter for Down Jones Newswires. Stay with us.
REHMAnd it's time to go to the phones. Let's go first to Bruce, who's in Baltimore. Md. Good morning, Bruce.
BRUCEGood morning. Yeah, I just want to make a quick comment that I get so fired up about this. Let's be honest, just tell it the way it is. The (unintelligible) the big banks, Wall Street, the finance institutions have influenced, have manipulated, have controlled in so many ways your contributions to different candidates, particularly the Republican Party, the people that support business. I believe in business, too, enterprise, but, you know, this nonsense has been going on for years and decades with credit cards, with lending, the hidden traps and fees in credit cards, the nonsense that these big banks and Wall Street, the lies, the manipulation that they did for years and decades.
BRUCEAnd, now, we finally get -- they try to pass a legislation for real consumer protection and real control and stuff, and the Republicans -- generally, the Republicans are against it or they want award them or they come up with all kind of nonsense and spin, it's a good thing. And I do believe they are afraid of Elizabeth Warren because she speaks the truth. She really cares about the proper control or...
CALABRIAI mean, I share Bruce's concerns. I certainly have a tremendous amount of frustration at Wall Street. First, I think we need to point out what is a very important fact here. The new consumer agency does not cover Wall Street. Your mutual funds, they are not addressed by this agency. That remains at the SCC, the Securities and Exchange Commission, so all this talk about taking on Wall Street is spin. This agency, by and large, exempts it, not to mention it exempts Freddie and Fanny. It exempts those realtors who told you that it was always a great time to buy. This organization is so riddled with the exemptions that almost anybody who actually had anything to do with the financial crisis is not covered by it.
RANDALLThere are exemptions, but the largest banks would be covered, large banks as well as thousands of financial firms that have not been directly regulated by the federal government. So a lot of payday loans, a lot of cash -- check-cashing services, but also the giant banks as well, and the bureau has new powers to find these companies. And that's what has a lot of people in the financial industry concerned.
PLUNKETTAnd, of course, the rest of the financial reform bill does cover Wall Street, does cover problems like swaps that Congressman Frank mentioned, and does close a lot of gaps that helped cause the economic crisis.
REHMAll right. To Oakville, Mo. Good morning, Fred.
FREDGood morning. I was -- people seem to object to collective or universal risk for particular deposits. Why not promote deposits to equity? That would limit the collectivity of the risk and obviate the FDIC and (word?).
PLUNKETTIt's not something we looked at, so I can't really comment.
CALABRIAI think he's partly -- I think what Fred is partly addressing is the amount of deposits and debt in the system versus equity. And, certainly, one of the problems with the financial crisis were that banks, corporations, households were all massively leveraged, something we haven't done anything about, and that concerns me as well -- another very big cause of the crisis left unaddressed.
REHMAll right. To...
PLUNKETTWell, we should note, though, that there -- the treasury, the Department of Treasury is looking at leverage restrictions, restrictions on the amount of leverage that large financial institutions can take on under the law.
REHMAll right. To Shawn, who's here in D.C. Good morning.
SHAWNYeah, hi. Good morning. Thanks for taking the call.
SHAWNTwo quick points. First, I applaud Mr. Calabria's use French, the canard, but maybe he should stick to French because irregardless is not a word. Second, I just wanted to point out that I wish you would address this from an international comparative perspective. Independent regulatory agencies in Europe are one of the chief reasons that they've been spared the worst effects of the financial crisis. And if you look at this across sectors -- everything from food and health safety to the financial sector, to credit cards, the banking sector -- it really makes a big difference. And it would be funny if it weren't so tragic.
SHAWNBut when Mr. Calabria said that he would prefer, regardless of who the head of the agency is, that the agency's rules would be enforced across administrations, when he knows that subject to the appropriation process is code for the agency's mission being destroyed, depending on which way the partisan winds are blowing. I'm...
REHMAll right, sir.
CALABRIAFirst of all, I'll react to being a libertarian. I fully believe in my right to make up whatever words I wish as I go along. Language is organic and growing, and I reject those who try to enforce some sort of conformity of language on me.
REHMSo you like the word irregardless?
CALABRIAI like the word, and I'm going to use it again until Webster's accepts it. That said, you know, everybody -- everything in the federal budget is important to somebody. I mean, the Defense Department is, of course, important. It's subject to appropriations. Does that mean we've ended wars because we have this department of war subject to appropriations? Governing is about making choices and about making tradeoffs, and that means the dollar goes here versus the dollar goes there. Congress needs to make the hard decisions of, say, do I put a dollar in this agency or do I put a dollar in the health care or do I put it on the education?
PLUNKETTThe history of consumer protection agencies in this country is a history of special interest affected by consumer regulation using their power to stop and limit funding for those agencies. That's why the funding for this agency, the Consumer Financial Protection Bureau, will not come through appropriations because the special interests have a leg up there. It will come from the Federal Reserve. There are many limits on the use of that money in the law, but the source of the funding is designed to be more independent...
REHMHmm. I see.
PLUNKETT...so that special interest can't manipulate the appropriations process.
RANDALLYeah, that' true. I think the authors of that, Frank, made it so that the bureau would be somewhat shielded from the political process. Although, early this year, it's clear that, I mean, a lot of Republicans still want to change the funding mechanism at the bureau, so it's not completely shielded. If there is a greater Republican representation in Congress anytime soon, maybe at some point they'd have the votes to actually change the structure of the bureau. So it was designed to be shielded, but who knows how long it could stay that way.
REHMYeah, all right. To Gig Harbor, Wash. Good morning, Rex.
REXGood morning. I was calling just to make a couple of points of reference. You guys were talking about kind of what sparked the product of the financial crisis. And I was in the mortgage industry during the up run to the financial crisis, and I would say that we weren't the cause of it. We were a product of an environment that allowed it to happen. I noticed that there was being sold to investors, as grade A paper. And I knew what was on that paper, and it was not grade A. The manipulations that were done for borrowers, they wanted to borrow these massive amounts of money, and it was pushed on us to, hey, we couldn't get our values, so call your appraiser and get another $40,000 in value so you can make this loan work.
REXThere were companies that would take the credit report that you printed off without running another one. You need 30 days after the fact. When you know that the credit has gone down substantially, that things have gone into collections, and they would accept that credit report. There are mortgage -- you know, it's great for certain purposes, but we were told to sell it. And this is what it is, and there's a thing called the truth in lending page. And on a lot of the adjustable rate mortgages, it was set up so it looked almost like it was a fixed rate at half the cost of what a 30-year fixed mortgage would be. And they sold it to us on the justification that, well, you don't know what the rate index is going to go up to, so we just leave that as this.
RANDALLWell, that's some of what Elizabeth Warren had -- has said she wants to address at the consumer bureau, not exactly what he's talking about, but more of the fine print and helping borrowers to understand...
RANDALL...what they're getting into, making prices more transparent.
REHMAnd to Rafael in Charlotte, N.C. Good morning.
RAFAELGood morning. Diane, I have a question for you. I own a commercial janitorial business. If my employees do a bad job, should I blame my supervisors? Or is it my responsibility as the owner? I think it is my responsibility. I was listening to Sen. Frank pointing fingers and calling people names at the Federal Reserve like things that they were asleep at the wheel. This is something that happened over years, and the Federal Reserve does report to someone. Whose responsibility was it really that the Federal Reserve was not doing its job?
PLUNKETTWell, the president appoints the members of the board of the Federal Reserve, but they -- it should be noted that the Federal Reserve is designed to be independent. Those terms are for a very long period of time. They cut across presidential administrations. And, ultimately, I think the Board of Governors of the Federal Reserve was responsible for their failures, chief among them, the head of the Board of Governors, who was Alan Greenspan for a very long period of time.
REHMMaya, if President Obama continues to hold off in naming Elizabeth Warren as head of this consumer protection bureau, who are the other names that are up there being considered?
RANDALLThere have been other names, I mean, Sarah Bloom Raskin, who's currently on the Fed, although it seems odd that she would leave the Fed position to run the bureau. But she's, you know -- she's obviously been able to get through the confirmation process. And then there's also -- it looks like some of the other people that they've reached out to -- ex-governors, other attorney general -- have turned down the position because it seems like something that Elizabeth Warren would want to run and should run. So some people have backed off because of that.
RANDALLAnd so, I mean, time is running out. It seems like there's no other choice but for the president to nominate Warren. And given that it would be unlikely for the Senate to sign off on her in such a short period of time, a recess appointment seems likely.
CALABRIAWell, first of all, I mean, the president has had a number of months, almost a year, to come up with a nominee, and, certainly, I think it's irresponsible not to have put a name forward. And that's only one of many nominations that have been filled. I mean, I hear a lot about Republicans blocking nominees. You can't block a nomination that hasn't been sent up yet, so I do encourage the president to send up a name. Certainly, I would agree as well that Raskin is one of those names who could get through. She's a former Sarbanes staff. Her people know her. Sen. Shelby knows her, likes her. They could get her through. She works on consumer issues at the Fed. That's primarily her expertise.
CALABRIAShe's been a bank regulator, ran bank regulation in Maryland, so, to me, she's somebody who is actually very similar to Elizabeth Warren. I mean, I would be no happier with her than I would be with Elizabeth Warren, but she could get through the Senate.
REHMBecause you want a commission. Travis.
PLUNKETTWell, this is a point I'd agree with Mark on. We'd like to see the president send somebody -- nominate somebody right away.
REHMWhy do you think he isn't?
PLUNKETTWell, it's -- he's in a bind. That's why. It's a tough decision because, on the one hand, you have a Senate that increasingly is not going to, in my opinion, move anybody who would strongly enforce consumer protection at the CFPB. On the other hand, you've got Elizabeth Warren and others who might do a very strong job being very popular and financial reform in general being very popular with the American public and with constituencies that want strong consumer protection. Plus, he's been focused on other things. However, this delay has been a problem. The president needs to nominate somebody right away.
REHMDo you think he will, Maya?
RANDALLI think he would have to. I mean, the bureau's powers are at risk. So if there isn't a director in place, come July 21 when the bureau is set to get all of its powers, it might not get all of those powers. So the ability to go after these payday loans and to look at them and supervise them and oversee them would be limited, or it wouldn't be there. So you have to get a director in place by July 21 for the bureau to have all of its powers.
REHMI see. Maya Jackson Randall is with Dow Jones Newswires. You're listening to "The Diane Rehm Show." And let's go now to Quincy, Ill. Good morning, James.
JAMESGood morning. My question is in regards to the Federal Reserve. A few years ago, they stopped publishing M3 data. From my understanding, M3 data was meant to kind of understand more of the speculation and the hedging going on as far as the Federal Reserve's action to it. I was wondering if that has played any role as far as the financial crisis.
REHMWhat do you think, Maya?
RANDALLI do not know enough about the M3 data to (unintelligible).
REHMOkay. How about you, Mark?
CALABRIAFirst, I mean, economists spend a tremendous amount of time arguing what you look at -- M1, M2 or M2 minus deposit -- small deposit...
REHMTell me what a M1, M2...
CALABRIAThe way to understand it is that M1 starts with the fairly narrow definition of money, which is, essentially, cash and deposits. And then as you get M2, M3, it becomes broader and broader, so it includes elements that are less and less liquid. Does that make sense?
REHMYeah, that helps.
CALABRIAAnd so M3 is sort of the broadest measure of money. I think there was feeling that some of the things in M3, like, say, CDs, were simply not liquid, that you weren't going to out and cash them, so that it was a lot of noise. I do think that there are, again, arguments about how much liquidity was in the system. So I do think it's a reasonable debate, but I don't think that it was a driver in terms of dropping the coverage of M3.
PLUNKETTIt's not something I've looked at, so I couldn't venture an opinion there.
REHMOkay. And to Cincinnati, Ohio. Good morning, James.
JAMESYeah, good morning. How you doing?
JAMESHave done a lot of studying about this. You know, it's really come to the point in this country where the financial -- excuse me -- the financial system is almost something you can do a Mafia at this point. I mean, with the rolling back of all the new deal things, like Glass-Steagall, it's just to the point where it's really run like a Mafia. They have banks. They do whatever they want. They have infinite amount of money to do what they want and four regulations at every turn. And the comment I'd like to make is we now have the biggest disparity in income almost in this country's history. Do you think it has anything to do with how badly the financial system in this country is totally toward the rich?
REHMAnd I think a number of people on -- who were calling in want to know about Glass-Steagall and whether it had not been repealed, would we have found ourselves in this situation? Travis.
PLUNKETTWell, Glass-Steagall was a Depression-era law, enacted just after the Great Depression that put limits on what various sectors, financial sectors, could do. They were basically placed in a box. If you did insurance, you needed to sell insurance. You couldn't do insurance and retail banking and investment banking, and the wall between -- a number of experts have called into question the wall that was removed between retail banking, you know, just serving the public through deposits and investment banking and have questioned whether it had that wall still been up -- some of the problems we saw with the securities industry would have occurred.
REHMWhat do you think, Mark?
CALABRIAI want to make -- 'cause there's two important issues here, and I want to touch very quickly on the income equality. I do think that some of the income equality has been driven by subsidies we give toward not just financial services, but to real estate in general. And the importance to this is that we decided to, over the last decade or so, invest in a housing bubble. Asset bubbles do not increase productivity, which increases wages. So you don't see wage growth by -- bidding up housing prices does not ultimately make us richer when it busts.
CALABRIAThe part of Glass-Steagall that, I think, is important, in my own, you know, sort of principle is that deposit insurance is not entitlement. If you want to limit risk that's taken around deposit insurance, I think that's legitimate. But there's almost no evidence. I mean, Lehman, Behr, they were not depositories. You cannot look at anybody who it would have made a difference on.
REHMMark Calabria, he's at Cato Institute, Maya Jackson Randall of Dow Jones Newswires and Travis Plunkett of the Consumer Federation of America, we shall see what happens to the Consumer Protection Bureau and whether it actually becomes reality. Thanks for listening, all. I'm Diane Rehm.
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