IN FOCUS: Fed View on Consumer Protection Gets Murky
Sloan, Steven, American Banker
Byline: Steven Sloan
WASHINGTON - Though the Federal Reserve Board is clearly opposed to handing off its consumer protection powers to a new agency, its proposed alternative has left many confused and others saying it would accomplish little.
In separate appearances before House panels last month, Fed Vice Chairman Donald Kohn and Elizabeth Duke, a governor, said Congress could explicitly mandate consumer protection as a core mission of the central bank instead of creating a new agency.
The comments were sufficiently vague so that, to some, it sounded as though the Fed was proposing to expand its dual mandate of promoting price stability and maximizing employment to include consumer protection - an idea many saw as unworkable.
"They already have a problem following the dual mandate because they tend to shift from one thing to the other," said Allan Meltzer, a professor at Carnegie Mellon University and a noted Fed historian. "You put a third thing in there, and they have another reason for not doing what they're supposed to do."
Many said that, adding to the dual mandate, which Congress enacted in 1978, makes no sense.
Full employment and price stability are "so important," said George Kaufman, a finance professor at Loyola University in Chicago. "They're overwhelmingly more important than consumer protection. A stable economy dominates everything."
Others said consumer protection would be a messy fit with the two other mandates. "It's the 'what does not belong in this picture' question, and you'd have to say the consumer piece," said Cornelius Hurley, a former Fed lawyer who now directs the Morin Center for Banking and Financial Law at the Boston University School of Law.
Some Fed supporters said that it could help, arguing that consumer protection gels with broader oversight of the economy.
"Good consumer protection can be consistent with economic stability and safety and soundness," a former Fed official said. But Joseph Mason, a finance professor at Louisiana State University, questioned the broader impact such a change would have on the conduct of monetary policy.
"Think for a moment of a world where interest rate policy doesn't work, the Fed wants to expand lending and can't figure out how," he said. "One policy tool becomes to promise or implement laxity to [give] lenders [an incentive] to expand credit."
Fed officials declined to discuss this on the record, but in private they say Kohn's and Duke's comments were misinterpreted. What the central bank is advocating, these sources said, is a simple reopening of the Federal Reserve Act to add language to the preamble requiring that the Fed protect consumers. The preamble now mandates that the Fed supervise banks and maintain an elastic currency.
In her testimony, Duke told lawmakers they "could formally codify consumer protection as a core mission or responsibility for the Federal Reserve, similar to monetary policy and banking supervision and regulation."
But observers are equally critical of adding consumer protection language to the Federal Reserve Act as an explicit duty. The theory is that such a change would signify the elevated importance of consumer protection at the Fed and ensure that future leaders of the central bank dedicate sufficient resources to the issue.
"Putting it as a core function is basically telling the Fed to spend more money on this and we won't mind if, at the end of the year, you send $14 billion instead of $15 billion" to the Treasury, said Robert Litan, a senior fellow at the Brookings Institution. …