Elizabeth Warren on the Great Economic Battlefield: Protecting the Middle Class from Financial Predators
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For years, federal banking regulators at the Office of Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Reserve helped the nation's largest banks wage war on the U.S. middle class. But President Barack Obama wants to change all that with a new regulator that answers exclusively to consumers, not bank balance sheets. AlterNet economics editor Zach Carter discussed the proposal to establish a Consumer Financial Protection Agency (CFPA) with the woman who came up with the idea, Harvard University Law School Professor Elizabeth Warren. After defending the American middle class for decades, Warren currently chairs the Congressional Oversight Panel for the Troubled Asset Relief Program.
Zach Carter: How did the existing federal bank regulators facilitate today's economic crisis, and how can a CFPA help?
Elizabeth Warren: The big arc of the story is that 30 years ago we had laws that put some basic fairness into the consumer credit market. Over time, the large financial institutions captured the regulators who were supposed to be the cops on the beat to enforce those laws. They also pumped hundreds of millions of dollars into Washington to make sure that no new cops were put on the beat. Without good laws, the industry started selling ever-more-deceptive products, and their friendly regulators looked the other way.
For example, when a dispute arose between a consumer and a bank, the regulator consistently chose the side of the banks. This was particularly true with the OCC.
ZC: The federal regulators even joined the bank lobby to file lawsuits, didn't they?
EW: They filed lawsuits to protect the banks because the banks needed the help of the government against those big, tough customers. Right? So, they kept pushing more and more deceptive products, and they ultimately destabilized not just the American family, but the entire American economy. Once the economy crashed, the industry demanded bailouts from the taxpayer. So now we're writing the final chapter of this story. And the final chapter is about who is in control moving forward. Will the banks continue to select their own regulators and write their own rules? Or will there be someone in Washington who wants to look out for consumers and who will be accountable to them?
ZC: So the regulators go from being cops, or enforcement agencies, to being something very close to lobbyists and advocates for the banking industry, particularly the large banks.
EW: They went from being cops to being the lookout driver. They stand out in front while the banks fleece their customers. And time and again, the regulators believed it was their job to defend and support the banks against customers.
ZC: The bank lobby has made the CFPA their top target since President Obama rolled out the proposal for it back in June. What are the banks so afraid of?
EW: That's right. In fact, I think their language was that they intended to "kill" it. The new agency would put an honest cop back on the beat. That's all. And that's what's so amazing. Think about this. The agency wouldn't have much more power than the Fed or the OCC currently has over credit cards, home mortgages and other consumer loans. The difference is that the consumer agency would be an honest cop. It would be an agency headed by someone who cares about consumers and who would be accountable to the people if consumers were being taken advantage of.
ZC: So what are the crucial provisions that need to be passed?
EW: Independence is at the heart of the proposal. It's not that we need some specific new rule, it's that we need an independent agency to write and enforce the rules that cares about consumers, not just bank profits.
ZC: The CFPA portion of the financial reform bill took some pretty significant blows as it moved through the House Financial Services Committee. They cut a provision that would have required any bank offering complex loans to offer a 'plain-vanilla' loan alongside it, and exempted the 8,000 out of 8,200 banks from CFPA enforcement. How damaging are those revisions?
EW: The small banks were exempted from primary enforcement, but the agency would continue to have secondary enforcement power over them. And they would still be subject to all the same rules. The rule writing authority applies to everyone. The CFPA would also still be the primary enforcer against big banks and the non-bank lenders—the mortgage brokers and the other folks who operate at the state level and not at the national level. But for community banks, the consumer agency would sit shotgun with the safety and soundness regulator, they wouldn't be totally excluded from the process.
ZC: But isn't enforcement the key here? We've had some decent rules on the books for a while that could have prevented a lot of damage if the existing regulators had enforced them.
EW: Enforcement is central, there's no doubt about it. But there are two points I want to make about enforcement. The first one has to do with concentration of resources. The worst actors in the consumer financial space have been the big banks on one end and the unlicensed, unregulated, non-banks like mortgage brokers and installment loan brokers on the other end. That's where the major abuses have been and that's where the enforcement effort should be concentrated. Community banks need to follow the same set of rules, as there’s no reason that the rules themselves should vary depending on whether a mortgage is issued by a big bank, a small bank or a mortgage broker. But for enforcement purposes, the community banks don't pose as much risk. And the CFPA would still have back-up authority under the House bill.
The amendment that bothers me a lot more is the exception for car dealers when they act as loan brokers. The House bill would let them cheat their customers without any supervision from the new agency. And the notion that car dealers are more trustworthy than anyone else in business is a little surprising to me. But this was just naked interest group politics.
ZC: I want to ask you some broad economic questions about the American consumer. About a third of all mortgages are underwater right now. The conventional wisdom is that the banks are healthy again, which is why they can pay out these giant bonuses. But we still have a major problem in residential real estate that is putting pressure on consumer pocketbooks. Is there any way to avoid a catastrophe without easing the pain for American households?
EW: No, we cannot repair this economy without repairing the finances of American families. American families have taken on extraordinary debt levels, they have suffered through slack wages at best, and for one in six now, there's no paycheck at all.
But the American working class and middle class have been under assault since the 1970s. When this latest crisis hit, they were already staggering. The recession just knocked down millions more of them. Families usually push ahead during boom times and fall behind in recessions. For example, income tends to go up in booms and then flattens out or maybe even declines a small amount in recession. But when you add up booms and you add up busts, the American family is usually still getting ahead over time. But the boom of 2000 yielded nothing to the American family except more debt. There was no jump in income for the middle class that we saw in earlier booms. Instead, all of the wealth creation was funneled to a tiny little group at the top of the spectrum.
ZC: A lot of those people at the top work in the financial sector, which is supposed to help everyone prosper by greasing the wheels of business and commerce. But has the financial sector been scoring its profits by cutting away from the middle class instead of helping it grow?
EW: That's exactly the point. The American middle class became the turkey at the Thanksgiving dinner. It's not only that they didn't get a seat at the table, they were served on a platter. They fed those who got rich during the boom. And so that means it's a much more fragile middle class even before the economy implodes.
Under the old social contract, the rich got richer, but so did the middle class. We always had the problem of the poor being left behind, but the middle at least participated in the prosperity and expanded. Look at those graphs from the '40s, the '50s, the '60s and into the '70s and you'll see that as worker productivity goes up, so does inflation adjusted wages. The pie is expanding, but the workers are getting a bigger piece of pie to eat every day, right? But they begin to diverge in the '80s. And the wages of a fully employed male in the 2000s are slightly less than a fully employed male was making at the end of the '70s.
ZC: Does the president get it?
EW: I think he understands this. And I was so heartened this week when he said, "I'm not giving up on a consumer agency, that's non-negotiable. I will stand and fight, right here." That means a lot.