Too Important to Fail: Predatory Lending Still Poses a Systemic Risk to the Economy. Will Obama's New Consumer Financial Protection Bureau Succeed in Taming It, or Will the Agency Be Strangled in Its Crib?

By Gravois, John | The Washington Monthly, July-August 2012 | Go to article overview

Too Important to Fail: Predatory Lending Still Poses a Systemic Risk to the Economy. Will Obama's New Consumer Financial Protection Bureau Succeed in Taming It, or Will the Agency Be Strangled in Its Crib?


Gravois, John, The Washington Monthly


If you want a hint as to where the battle of the 2012 general election might go, you could do worse than to look at where it started. On the morning of January 4, 2012, in his first official act of the campaign year, President Barack Obama mounted a podium in a packed high school gym outside Cleveland and rolled out an announcement. Blowing past months of GOP filibustering, he declared his recess appointment of Richard Cordray, a mild-mannered former Ohio attorney general, to serve as the first head of the Consumer Financial Protection Bureau, a powerful new regulatory agency created by the Dodd-Frank law. Back in Washington, GOP leaders, who had held Congress open in a pro-forma session during the Christmas break precisely to block such a recess appointment, went into fits of televised dudgeon, calling the move "arrogant," "unconstitutional," and--this from Mitt Romney himself--"Chicago-style politics at its worst."

The consumer bureau has provoked virulent opposition from Republicans ever since it emerged as the brainchild of Elizabeth Warren, the Harvard law professor turned progressive folk hero who is now running for Ted Kennedy's old Senate seat in Massachusetts. Though the GOP couldn't stop the creation of the CFPB, it did manage to put enough pressure on Obama to make him shrink from nominating Warren to serve at its head, a decision for which he was promptly vilified by liberals. Then, when Obama nominated Cordray, Republicans held the appointment hostage, demanding structural changes to the bureau that would have made it more accountable to congressional committees and the industries that comfortably influence them. Most recently, in May, Glenn Hubbard, a top economic adviser to the Romney campaign, suggested to the Wall Street Journal that defanging the bureau would be a central agenda item in Romney's economic strategy.

This GOP fury might seem strange, even self-destructive, from afar. After all, the prime mission of the CFPB, which is still just barely up and running, is to crack down on predatory lending--a range of practices epitomized by the sale of the exploding subprime mortgages that hollowed out much of the wealth of America's middle class and precipitated the Great Recession. Polls show that, though few Americans are yet aware of the CFPB, an overwhelming majority support it once they learn about its mission of protecting consumers from big financial institutions.

Nevertheless, the now-bailed-out financial sector claims that if a strong regulator scrutinizes the safety of its products--as the federal government does with toys, cars, appliances, airlines, food, drugs, and most everything else that's for sale in our capitalist economy--it will tank the industry. And so it has gone to war.

Obama's rather nervy decision to begin 2012 by appointing Cordray suggests that he is prepared to make the CFPB an issue in the campaign--as well he should. We might as well just say it: saving the CFPB is essential to fixing the fundamentals of our economy and even restoring the American Dream. Americans need a strong financial sector, but not, as we now know from painful experience, one that profits by methodically stripping its customers of their assets. Predatory lending has become endemic to the business model of American finance, and until that changes, it's hard to see how the economy can once again provide broad prosperity. Not even the financial services industry itself will prosper in the long run unless it adopts a business model that helps build, rather than erode, the wealth of average Americans. The question is whether the bureau can survive the Republican onslaught, and, if so, whether this "twenty-first-century agency" will be powerful enough to change the way our consumer finance market behaves.

The origins of the CFPB trace back, as many things do, to a conversion experience. In the early 1980s, Elizabeth Warren was a young conservative law professor in Texas who had set out to study why families filed for bankruptcy. …

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