Privatizing Financial Protection: Regulatory Feedback and the Politics of Financial Reform

Abstract

Consumer credit is a crucial source of financial support for most Americans—part of what scholars dub the “credit-welfare state.” Yet, borrowers have been reluctant to take political action to demand better consumer financial protection, even as subprime lending proliferates. This paper articulates a broad theory of regulatory feedback effects, proposing specific mechanisms through which regulatory policy making shapes consumers’ politics. Drawing on the case of consumer financial protection, I argue that consumer credit regulations produce feedback effects that diminish political engagement by encouraging borrowers to blame and subsequently target market actors—including financial institutions and consumers themselves—for both systemic and individual problems with predatory lending. I analyze an original policy dataset, original survey of 1,500 borrowers, and two survey experiments to test this hypothesis. I find that borrowers’ experiences with credit regulation diminish their political engagement, even for reforms they support, limiting the prospects for safeguarding Americans’ financial security.