“Hindsight is a wonderful thing,” Tim Long, the OCC’s chief bank examiner, told the New York Times last month as he explained why his regulators didn’t crack down on dodgy lending practices before the housing bubble popped. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”
Good lord. The whole reason we have regulators is so that, “at the height of an economic boom” like the one that crested in 2007, someone from the government will be standing by to tell lenders not to go overboard. If Long and his crew had done that this past cycle, the ensuing hangover wouldn’t have been nearly so painful. Instead, now he says that trying to rein in unsound lending practices during a boom is some sort of metaphysical impossibility. Pathetic.
Regular readers know that Tim Long is nobody’s idea of a softie when it comes to regulatory matters. Nor do I mean to single him and his office out for blame for the credit crunch. But if even Tim Long can’t bring himself to slow lenders down when the credit cycle is roaring, I can’t imagine who could.
The reason I mention all this is that the House this week is considering creating yet another financial regulatory agency: the Consumer Financial Protection Agency. It is a bad, bad idea.
The CFPA, as you probably already know, is supposed to be a financial-products version of the Consumer Products Safety Commission. The idea, apparently, is that it will regulate consumer financial products, from credit cards, to mortgages, to payday loans, to ensure that they are “safe” for consumers. As a practical matter, that will presumably mean the agency will, for instance, cap fees and rates on credit cards, limit prepayment penalties on mortgages, and who knows what else.
Which is to say, the CFPA will be unique among banking regulators: it will exist to, at the margin, help weaken the financial system, by preventing banks from offering profitable products that their customers actually want. Instead, the agency will get in between lender and borrower and force banks to price key products at levels that will either undermine their profitability or render them uneconomic, or useless, or both.
Which is exactly the opposite of what the government should be wanting to happen right now. The country’s banking system, remember, has at last begun to recover from its worst freezeup in most people’s memory. Balance sheets are battered. Many banks are losing money, and figure to keep on losing money into next year. The most effective way for banks to repair their balance sheets (and thus fund loans in the next cycle) is for them to return to robust profitability ASAP. Diktats from the CFPA, in the name of “consumer protection,” will only slow that process down—perhaps by a lot. Why that’s supposed to be a good thing for consumers I don’t understand.
But the CFPA won’t just hobble the banking industry’s recovery. It will also reduce the amount of credit available to individuals and businesses. Say what you will about the aftershocks of the subprime bust, the democratization of credit is a good thing, not a bad thing. Innovative lending products—yes, even ones aimed at subprime borrowers—can, when properly underwritten, finance home purchases and business startups and expansions that would otherwise go unfunded. If CFPA meddling renders some of these products unprofitable, lenders simply won’t offer them. How’s that supposed to help fuel the recovery?
Critics of the banking system say that the credit crunch is proof the industry needs to be more tightly regulated. No. As it is, the industry’s overseen by four separate agencies. Where were they when lenders went off the deep end in 2006 and 2007? Besides, the market itself has already imposed more new discipline on the banking industry than any new passel of bureaucrats can. The list of institutions that have collapsed, from Lehman Brothers, to Washington Mutual, to Countrywide, is long and impressive. Their demise has concentrated the minds of the executives that manage the institutions that remain. So, CFPA or not, you won’t be seeing many 95% LTV no-doc option ARMs being written any time soon.
Will lenders eventually loosen their underwriting standards again, and start to do dumb things? Of course; that’s how cycles work. But don’t look for any help from the CFPA then, either. “Hindsight is a wonderful thing,” Tim Long says, in defending his agency. His OCC either wouldn’t or couldn’t prevent banks from overreaching at the peak, when active regulation would have done some good. Why should we expect the bureaucrats at the CFPA to be any wiser? They won’t. Instead, all they’ll do is gum things up in the meantime—and help retard the credit creation that will fund the next economic expansion.
What do you think? Let me know!