Harvard Law School Professor Elizabeth Warren is chair of the Congressional Oversight Panel, created in 2008 to monitor the Treasury Dept.'s bank bailout and to review the regulation of financial markets. With a compromise on financial-reform legislation looking imminent, I talked with Professor Warren on Mar. 3. Edited excerpts from that conversation follow.
Tell me what you think about the debate over a consumer protection agency. A House bill calls for an independent agency. Now you have Senators Chris Dodd and Bob Corker of the Banking Committee suggesting a compromise may put it inside the Federal Reserve.
This is less about real estate and more about genuine independence. So here's the deal: Right now the Fed has the power actually to do a lot of this. The Office of the Comptroller of the Currency, which is the federal bank regulator, has the power to do a lot of what this agency would do. But the truth is, they're not interested. It's not what they do.
Someone said monetary policy was in the penthouse and consumer protection was in the basement.
It's the stepchild nobody wants. There's nobody in Washington focused on the economics of the family, focused on the consumer products—credit cards, mortgages, car loans, overdraft fees. All the stuff you have to do in your daily life to survive economically. This is an industry where the business model has fundamentally changed. Back in 1980 the credit-card agreement for Bank of America would have fit on one sheet of paper. Terms were clear. They figured—well, here's your creditworthiness, and here's what we have to charge. We're a little worried about inflation, how much it's going to cost us to monitor this, so we'd better make a little profit. It worked, right? Mortgages were set up pretty much the same way; car loans, too. Then we got rid of usury laws. And the credit-card folks said, you know, we could just hold up one or two things in front of you: low, low financing—7.9%. We could hold up free gifts. We could hold up a warm and fuzzy relationship. And then we could put what are called in the trade revenue enhancers back in the fine print, and we could make a lot of money because you won't figure out what this product costs. So that one-page credit-card agreement in 1980 has now grown to about 30 pages. And it's not just 30 pages, it's 30 pages of incomprehensible fine print.
Even though you say it's not about real estate, do you have a preference where this agency should be?
A whole new bureaucracy even though the Fed has the tools to start doing it tomorrow?
There are seven bureaucracies in Washington right now that each own a piece of consumer financial protection. Bloated, inefficient, and either ignored and ineffective or captured by the large financial institutions. [This is] the regulatory system we've got now. It works very well for the large financial institutions because it means no effective regulation. What I want is to take this agency out of those seven agencies, shrink it down, and make it effective. You've got to have an agency that's ultimately independent, whether it's located within the Fed, within Treasury, within the Department of Agriculture, or whether it sits in its own separate place. The key is whether or not it is functionally independent. Does it write its own rules? Does it enforce those rules and does it have access to a budget that's independent of the folks who want to smother it?
What do you think will happen?
Politics is already happening, Charlie. Let's be clear where we are. This is an agency that just makes sense. This isn't liberal or conservative. This isn't a division of ideology. This is about bank lobbyists. This is about people who are paid professionally to kill this agency so they can protect the revenues of Wall Street banks.
Are Dodd and Corker serving the interests of the bank lobby?
Well, we'll know when this bill comes out of Congress.
As part of overall financial reform, where do you put the significance of the agency?
The tip of the spear in the sense that this is where our financial crisis started: one lousy mortgage at a time; one family who got tricked, cheated at a time. Then those risks were sliced, diced, and put into all kinds of fancy financial instruments that made billions for Wall Street banks and then [crashed] the whole system.
Are you in favor of the so-called Volcker Rule that suggests commercial banks shouldn't engage in proprietary trading, owning hedge funds, owning private equity firms.
I like Volcker, but I think it has to be a little bigger. The idea behind it is if you're going to take deposits, if you're going to be one of our guaranteed institutions, then there is a range of interconnected financial activities that have to be more carefully examined: defaults and swaps and derivatives. We can't let a nonbank pull the whole game down.
What else do you want to see in a regulatory bill?
We started at families. The other end is too big to fail. [We need] a Chapter 11 system, whatever we want to call it, a part of the legal structure that permits us as a people to say with real credibility: I don't care what your business is. I don't care how big you are, how intertwined you are. If you make bad enough decisions, you can be liquidated. Your shareholders wiped out and top management fired.
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