Posted by | December 21, 2011 01:48 | Filed under: Top Stories

by Stuart Shapiro

As the battle to confirm Richard Cordray to lead the Consumer Financial Protection Bureau (CFPB) continues, it helps to remember why such a bureau is needed.  Jean Yin has a nice summary of the key issues behind the empowerment of the CFPB.

Richard Epstein, law professor at the University of Chicago and New York University, similarly observes that a variety of statutes and regulations already exist that outlaw fraud and require disclosure on key terms.  But he writes that adding new financial regulations will only “do more harm than good.” In his view, “we have already passed the point of diminishing returns for additional ex ante regulation in financial markets.”
[UNC Professor Melissa] Jacoby disagrees, citing research showing “that African Americans and Latinos pay more in closing costs on their Federal Housing Authority-insured loans than white borrowers.”  She questions whether these outcomes reflect the product of true choice.

Whether consumers receive adequate disclosures is one thing, but whether they can then make rational decisions is another, even if they have the benefit of full disclosure.

The first reason that a CFPB is needed is that it is clear that banks and credit card companies do not disclose all terms to their customers and won’t do so absent some credible threat of punishment if they don’t.  I buy this and think this is enough of a reason to support the CFPB and Cordray’s confirmation.  The second reason that Yin mentions is that consumers may not be able to act in their own best interest (and this debate has its roots in the behavioral economics I blog on occasionally).  This one is much trickier and I’m still figuring out how I feel about it.

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Copyright 2011 Liberaland
By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.