Fed Up, Consumers Down

The Federal Reserve isn’t exactly known as a friend of the little guy. And for good reason.

So it borders on parody that Senate Finance Committee poobahs are close to a deal to fold the proposed Consumer Financial Protection Agency into the Fed, where it will never be heard from again. Which is the point, as the WSJ says in a bit of understatement:

Republicans might be more supportive of the Fed option because they might see having Fed officials involved could lead to more bank-friendly policies than an independent regulator.

You know, because those folks over at Treasury, which Senator Dodd floated last week as a dumping ground for the CFPA, are a regular bunch of Ralph Naders. But the filibuster apparently makes an independent agency a non-starter—yet another casualty of non-majority rule in the Senate.

And the Fed did such a bang-up job with its existing consumer responsibilities in the bubble that it’s apparently safe for anti-regulation types to sign on. Everyone, especially every journalist covering this, ought to go read Binyamin Appelbaum’s September piece in the Washington Post for more on how the Fed abrogated its responsibility to protect consumers.

During the boom, however, the Fed left those powers largely unused. It imposed few new constraints on mortgage lending and pulled back from enforcing rules that did exist.

The Fed’s performance was undercut by several factors, according to documents and more than two dozen interviews with current and former Fed governors and employees, government officials, industry executives and consumer advocates. It was crippled by the doubts of senior officials about the value of regulation, by a tendency to discount anecdotal evidence of problems and by its affinity for the financial industry.

Here was the peg of that piece:

Congress now is weighing whether the Fed should be fired. The Obama administration has proposed shifting consumer protection duties away from the Fed and other banking regulators and into a new watchdog agency. That proposal, a central plank in the administration’s plan to overhaul financial regulation, is opposed by the industry and faces a battle on Capitol Hill.

What a difference five months makes. Even no less a Fed creature than Alan Greenspan told the Post back then that the central bank was no place for a consumer agency. (UPDATE: Also, see this 2007 New York Times effort on the Fed’s consumer neglect.)

Appelbaum and colleague David Cho are on the case here, putting this key information up high in their piece today:

The Fed already is responsible for writing consumer-protection rules, but it did not prohibit some of the most abusive mortgage and credit card lending practices during the housing boom.

The Financial Times also points this out up high:

The Fed risked losing its consumer protection responsibilities after it was widely criticised for failing to crack down on the mis-selling of mortgage products and the expansion of subprime lending in the run-up to the financial crisis.

The New York Times doesn’t bother with this critical piece of context.

But I like this from Bloomberg on Dodd’s flip-flopping:

Dodd’s willingness to give the consumer power to the Federal Reserve represents a departure for the Connecticut Democrat who for years has hammered the central bank for failing to use its existing consumer authority to crack down on mortgage and credit-card lending abuses. In November he called the Fed’s handling of consumer-protection responsibilities an “abysmal failure” and said the central bank should focus on monetary policy.

This is also good Bloomberg stuff (emphasis mine)

The Fed for the first time in 2008 tapped authority it’s had since 1994 requiring lenders to determine a borrower’s ability to repay and banning some prepayment penalties.

In 2008 it also adopted rules cracking down on unfair or deceptive credit-card practices after House Financial Services Committee Chairman Barney Frank proposed legislation to dilute the central bank’s power to write those regulations by giving it to other regulators.

It seems like it would be a good time to revisit the Fed’s record on consumer protection one more time.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.