Why Now is Not the Time to Revamp Consumer Financial Protection

Abstract

This note is based on remarks I gave at a conference held at the New York Federal Reserve Bank on January 6, 2010 concerning proposals to reform consumer financial products protection in the United States. It observes that the U.S. Department of the Treasury’s proposal for a radical increase in the scope and stringency of consumer financial product regulation was a mistake. Treasury's proposal was based on the false premise that failed consumer financial regulation was a significant cause of the financial crisis. The resulting focus on consumer protection has distracted Treasury and Congress from pursuing serious reforms of prudential regulation and dealing with other problems that are widely acknowledged to have contributed to the crisis. The proposed consumer protection legislation is also badly timed since the regulations would make lending more costly and difficult for financial institutions during a period of time when the Administration should be making it easier for consumers and small businesses to borrow to reignite the economy. While consumer financial regulation is important and could no doubt be improved, the advocates for a new agency with sweeping powers have presented essentially no evidence that the benefits of this agency would outweigh its costs.