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Obama's Consumer Protection Agency Explained

MICHELE NORRIS, host:

To help us make sense of all this, we turn now to Adam Davidson. He's a member of our Planet Money team. And Adam, this is big complicated stuff. So today we're going to try to take just one central piece of this and try to understand it, this Consumer Financial Protection Agency. We heard about this from Scott Horsley. But could you tell us a little bit more about why the administration has seen fit to create this new agency?

ADAM DAVIDSON: Well it's really interesting in the big white paper that the administration released today. They say that consumer financial products -we're talking about mortgages, credit cards, basically the stuff we get from banks and other financial services companies - have been regulated - in fact, have been regulated by many different regulators - but that we've learned that there were gaps, there were things that regulators weren't paying attention to.

And obviously lots and lots of Americans got mortgages that they didn't fully understand, mortgages that probably any reasonable financial advisor or someone looking at this objectively would say, boy, may be no one should have ever gotten an interest-only-balloon-option-arm mortgage. So this new agency would look at this, and, I guess sort of modeled on something like the Consumer Product Safety Commission, which says hey, you can't sell a toaster that burns down a house - would say you can't sell a mortgage that makes someone lose their house.

NORRIS: So this all sounds wonderful but how will this work?

DAVIDSON: Well that's the issue. Will it work at all? What the administration's own white paper shows is that these are not new powers. The government and a variety of regulators have had the power to make sure that the products that banks and other financial services companies sell to us are good and sound and reasonable. And for a variety of reasons, they clearly have fallen down on the job. And so creating a new agency, sure it's easy to imagine that for the first few years, or our first while, they will pay very close attention to more exotic financial products.

But it's pretty easy, and a lot of the people I talked to today say 10 years from now, 30 years from now, 50 years from now, is this really setting in place a fundamental change, or is this just one more layer of regulation in a regulatory system that fundamentally broke down? Objection number two actually comes from small banks. They say that this works to benefit the large banks that caused this crisis. And by imposing a huge burden on small banks, it actually penalizes the very banking institutions that weren't selling junk that defrauded customers.

NORRIS: So if the Consumer Financial Protection Agency lives up to its name and tries to protect consumers, what is an example of a burden? I guess that's what they call it that this new agency would impose on one of those small banks that's so worried about the new system?

DAVIDSON: The small banks say that this new system imposes huge regulations on them that will, for example, force them to hire more lawyers. If your entire profits are $300,000, you can't hire too many more lawyers before you run out of money. Whereas the large banks can spread the costs of this new regulation much more easily. So it penalizes the part of our system, this is the argument, that was the most stable and it effectively rewards the part of our system that was the most unstable.

NORRIS: And if it does that then it's the larger banks that would be more likely to survive. And wasn't that one of the lessons of the financial crisis, that big banks can sometimes - or big institutions - can sometimes, cause the biggest problems?

DAVIDSON: I have been talking all day long with behind-the-scenes folks in the government with economists and banking professionals, and I'd say the big disappointment that I have heard is that this plan does not, in an aggressive full-on way, say we will no longer in America have large - banking and other financial institutions - so large that we cannot allow them to fail. This proposal does say that we should eventually do something about it. But it doesn't have the kind of pointed, focused attention on that issue that an awful lot of people were hoping.

NORRIS: Thank you Adam.

DAVIDSON: Thank you.

NORRIS: That's Adam Davidson, from our Planet Money team. You can find a lot more at the Planet Money blog and the podcast. Just go to npr.org/money. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Adam Davidson
Adam Davidson is a contributor to Planet Money, a co-production of NPR and This American Life. He also writes the weekly "It's the Economy" column for the New York Times Magazine.