We’re not wimps. As consumers, we can pretty much take care of ourselves in most situations. We know to check the expiration dates on dairy products. We look for evidence of wet basements or aged roofing when considering a house. We know we’re supposed to read the small print in contracts. And we know that the axiom that has historically ruled buying and selling transactions puts the burden on buyers: caveat emptor (“let the buyer beware”).
So why would Representative Rush Holt be leading a move in Congress to create a new Consumer Financial Protection Agency? Do we really need one more agency in Washington? Or, isn’t there some existing agency there that can do whatever needs doing?
In reverse order, the answers are No, Yes, and Here’s why:
Caveat emptor has been around for centuries. Back in simpler days when the product to be sized up was a horse, any would-be buyer knew to check its teeth to determine its age. The longer in the tooth, the older the horse. And as recently as the middle of the last century, most would-be purchasers of a used car knew it wasn’t enough just to kick the tires but also to inspect what lay under the hood. Signs of blown gaskets or oil leaks were easily recognized. A pull of the dipstick revealed whether super-thick oil had been put in to minimize tell-tale exhaust smoke caused by worn-out piston rings. And nobody even dreamed of believing the mileage on the odometer.
Looked under the hood of your own car lately? Have the foggiest idea of what all that stuff is? Know the condition of the dozen or more computer chips that are buried in there somewhere controlling almost all that happens from the instant you twist the ignition key? Everything’s obscure and complex.
Same for financial products, from mortgages to credit-card offers to derivative investment vehicles squished together like sausage from scraps of Wall Street offal. They are so complicated these days that precious few people can figure out what they really mean. And some are cleverly intended to mislead you. Caveat emptor may be the axiom, but lots of luck trying to beware all by yourself.
And that is exactly why Representative Holt is leading the charge to create an agency that has one job and one job only: to make sure that ordinary citizens can fully understand and confidently trust the financial products that are offered to them.
If the Consumer Financial Products Agency (CFPA) envisioned by the bill just passed in the House of Representatives had been in place for the last few years, we would not have suffered the abhorrent abuses and predatory lending activities that have lured both individuals and our entire country into financial disaster. No more hidden increases in interest or bubble payments to blindside people paying mortgages. No more credit card come-ons that mask usurious rates behind shell-game-like enticements. No more high-cost subprime charges to consumers who were never told they actually qualify for lower-rate prime mortgages.
Nobody ever wants to go through this financial trauma again, and the CFPA is designed to ensure that we never will.
Guaranteed? Of course not. No agency at any level of government (and no for-profit business, either) is immune to errors of commission and omission. But we’re smart enough to know that waiting for perfection is pretty silly when extra barriers can head off the vast majority of things that damage us. Where would we be without organizations like the Food and Drug Administration who work every day to ensure the safety of what we put into our bodies, deflecting both disease and death. Given the recent near-death experience of our national economy, and the actual death of millions of Americans’ dreams of home ownership and financial solvency, who would be so cavalier as to call for reliance on nothing but caveat emptor to protect both nation and neighbor.
Well, if we really need a CFPA, why not give this job of policing financial products to an established agency, like the Federal Reserve? Unfortunately, the Senate is now considering doing exactly that. But this is a very bad idea for two reasons: The Fed currently has another quite monumental job to do: managing the supply of money in the country and the world. Heaven forbid that they take their eye off that ball. And the other reason is quite practical: the Fed failed, miserably and predictably, when entreated years ago to play the very role envisioned for the CFPA. Didn’t know how, and didn’t want to learn how. That was a blessing in disguise, as it turns out.
So now it is up to us to get in touch with Senators Menendez and Lautenberg and with Representative Holt to urge them to hold fast to the House-passed model of an independent Consumer Financial Products Agency. The House/Senate conference resolution of this issue is imminent, so today would be a very good day to take that action. Your voice does count.