The political worldβs atwitter speculating about what the Democratic debacle in Massachusetts will mean for health insurance reform. But the rapidly diminishing fortunes of the Senate Democrats are already evident in a quieter, yet equally consequential policy debate: Whetherβand howβWashington will ensure that Joe the Consumer gets a fair shake from the big banks.
The Demsβ point person on that question is veteran Sen. Chris Dodd from Connecticut, who chairs the Senate Banking Committee. Yes, thatβs the same former presidential hopeful who has chosen retirement rather than face certain defeat in November. So perhaps itβs no surprise that Dodd, once bullish on the subject of financial reform, appears to have downsized his ambitions on this question, too.
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The political centerpiece of President Obamaβs financial reform package is a new agency dubbed the Consumer Financial Protection Agency. Once upon a time, it had no more spirited defender than Dodd. Responding to the banking lobbyβs objection to the idea back in June 2009, he railed, βThe very people who created the damn mess are the ones now arguing that consumers ought not to be protected.β
By last week, though, Doddβs tone had changed. Actually, heβd gone mum, but multiple press reports revealed that he is now working on a deal with the Banking Committeeβs ranking Republican, Alabama Sen. Richard Shelbyβa deal that would drastically water down the proposal in order to win GOP support for broader financial reforms. This, of course, wonβt workβmaking it bad politics that will result in worse public policy. But thatβs the Democratic way these days.
The GOP is just as eager to bog the White House down with fixing Wall Street as they were with remaking health insurance. Republican leadership long ago publicly swore off supporting any part of Obamaβs agenda, so why start now? Why hand the Democrats a popular, easily understandable victory against the banks to campaign upon? As the Washington Postβs Ezra Klein put it, consumer protection is βthe public option of financial reform.β
But while it may be redundant to say so, Doddβs pending back-room deal is yet another capitulation that America really canβt afford. And itβs one that will leave black America particularly vulnerable.
The American Bankers Association has argued that a new agency to protect consumers is both unnecessary and confusing. The industry lobby group notes that existing bank regulators already count consumer protection as part of their missions. Separating the job into a stand-alone agency, lobbyists say, would set up bureaucratic turf wars with banks trapped in the middle. So Dodd and Shelby are reportedly negotiating a deal in which one of the existing regulators would beef up its consumer-protection arm, and Obamaβs independent agency would be scrapped.
If that happens, you can forget about any real change. Think about it: Bank regulators have clearly struggled with just their primary mission of keeping the financial sector from going over a cliff. Never mind their secondary, wedged-in responsibility to protect consumers. Pat Garofalo in Think Progressβ Wonk Room puts it well:
<blockquote>We already have plenty of examples showing how consumers are forgotten by regulators with divided mandates. After all, the Federal Reserve was given consumer protection powers in 1994 that it simply never exercised. The Office of Thrift Supervision and the Office of the Comptroller of the Currency both have consumer protection responsibilities as well, but neither can credibly claim to have stopped banks from running roughshod over consumers.</blockquote>
Part of the problem is that the conflict the American Bankers Association fearsβbetween protecting consumers and keeping banks solventβalready exists. A regulator charged with minding the safety and soundness of the financial sector may, for instance, see nothing wrong with gouging credit card customers if it helps keep a bank on firm financial footing. And as weβve all painfully learned, consumers have neither the time nor the resources to stay informed about complex financial instruments that, by design, sound like way better deals than they actually are. We need a watchdog to keep up with this stuff on our behalf.
The Government Accountability Office offered further proof of that plain fact in a study last month. GAO looked at all subprime loans made between 2000 and 2007 and found a whopping 27 percent failure rate. βThe harm caused by subprime mortgage lending considerably outweighed any benefits it provided,β blogged Alan White, one of the nationβs leading researchers on foreclosure. βIt is hard to imagine now what benefits could have outweighed a 27 percent lifetime foreclosure rate, and the resulting loss of nearly 2.5 million homes.β
A truly powerful consumer watchdog could have stopped the subprime fire; instead, existing regulators watched as it burned down the entire housing sector. And nobody suffered more from that failure than black borrowers, who were three times more likely to be sold subprime loans than their white counterparts, at all income levels.
Iβll never forget sitting across a table from a retired cop in Jacksonville, Fla., last spring. He sat there, with his mess of mortgage documents and foreclosure notices sprawled out in front of him, struggling to explain why he signed a subprime refinance that, in todayβs light, seems such a bad bet. βIf I hadnβt been so gullible,β he said, clearly frustrated with himself, βto believe β¦ that thereβs somebody there to look after the little man, thereβs somebody there to prevent this kind of thing from happening, I wouldnβt be in it. My strongest disgust with the whole thing isββ he broke off and groped for the right words, then settled on a basic truth: βI donβt have a problem in you screwing me. I have a problem when you screw me and you donβt teach me the game.β
Obamaβs new agency would do one better: It would deputize somebody to keep up with the gameβs ever-changing rules. Thatβs the last thing a bloated, predatory andβas weβve learnedβdangerous banking sector wants to happen. And thereβs no better proof that itβs a defense we desperately need.
Kai Wright is The Rootβs senior writer. Follow him on Twitter.
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