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Rooting for Financial Reform
by Heidi Unruh |
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On July 21, President Obama signed into law a massive financial reform bill that appears at once ambitious and incomplete. And, to non-Wall Street Journal types like me, mostly unintelligible without translation.
On balance, the new law represents a major step forward in protecting consumers from predatory financial practices and heading off the next wave of economic crisis. A letter signed by Ron Sider and other faith leaders sent to the Senate as it prepared to debate the bill cited the urgency of fairness and transparency in lending practices, especially for low-income communities.
While we should laud the potential accomplishments of reform, it’s also important to recognize its limitations. Where the new law fails is primarily in sins of omission and uncertain outcomes. So here are some of the main “that’s good / that’s bad” talking points of the legislation:
Good: Acknowledging that market forces alone are inadequate to “rein in the abuse and excess” on Wall Street, this reform bill submits financial institutions to greater public oversight in order to restore consumer confidence and economic stability.
Bad: Legislators passed on much of the responsibility of fleshing out implementation to agencies and regulators, who tend to be less accessible to public scrutiny and accountability than elected officials, and more susceptible to back-room dealing. (Thus former SEC chief Harvey Pitt quipped that the law should be called the “Lawyers’ and Consultants’ Full Employment Act of 2010.”)
Good: The law restricts shadowy financial practices—such as trading derivatives, promoting credit default swaps, pushing risky loans, and sponsoring hedge funds—by banks, payday lenders, and mortgage brokers.
Bad: The regulations do not touch the shadowy financial practices of auto dealers, insurance agencies and pawn brokers, “who apparently hired more effective bribers.”
Good: The government gains new authority to regulate and wind down large, troubled financial firms without using taxpayer dollars. As President Obama declared: “No more tax-funded bailouts, period!”
Bad: Fannie Mae and Freddie Mac, government-owned companies whose questionable financial practices helped pave the way into this recession, are not covered under this law and thus presumably still bailout-able.
Good: Financial institutions can no longer impose hidden fees or spring sudden changes in credit rates.
Bad: Financial institutions will likely come up with new above-board fees and rate increases to replace lost revenue. (In other words, credit safety comes with a price tag.)
Good: The overhaul includes two important steps toward global economic justice: the Energy Security Through Transparency Act requiring oil, gas and mining companies to “publish what they pay” to foreign countries in exchange for resource extraction (empowering citizens to prevent their leaders from secretly siphoning revenue for personal gain—see last week’s ePistle); and the Conflict Minerals Trade Act, requiring companies to disclose the source of minerals used in their products (in order to shed light on exploitive extraction practices contributing to violence and human rights abuses in eastern Congo—as described in this past ePistle).
Bad: For good or for ill, millions of people in resource-rich but cash-poor nations rely on the resource extraction industry for their livelihood. In the short term, increased regulation could further jeopardize the economic stability of these regions.
Good: By capping fees that banks charge retailers for debit/credit transactions as well as allowing incentives to use cash, the legislation may result in lower costs to consumers. This is significant given that on balance, credit cards benefit the wealthy at a net cost to low-income consumers who don’t even use them (see the research).
Bad: Credit/debit cards may become relatively more expensive or inconvenient to use compared to cash. Or is this really a bad thing?
Good: The law establishes a new autonomous watchdog agency, the Consumer Financial Protection Bureau, to regulate consumer financial products, enforce restrictions and monitor consumer complaints.
Bad: The question of who will head this new agency has already been generating a new volley of partisan hostilities and lobbying activity (see below).
Good: Jim Wallis summarizes the underlying goals of reform: “These principles—clarity, transparency, accountability, and protecting the common good against private greed—now give a stronger voice to Main Street in facing Wall Street.”
Bad: Let’s not kid ourselves. Greed, corruption, and irresponsibility litter our Main Streets as well. But it’s important to start somewhere.
Good: “By justice a king gives stability to the land …”
Bad: “… but one who makes heavy exactions ruins it” (Proverbs 29:4)
Action point:
Harvard professor Elizabeth Warren called for a consumer financial protection agency back in 2007, likening the regulation of financial products to that of other consumer items: “If it’s good enough for microwaves, it’s good enough for mortgages.” As chair of the Congressional Oversight Panel created to investigate the US banking bailout, she proved herself a bold advocate for consumers. Her competence, intelligence and integrity are well-respected. (Listen to Jim Wallis’ interview with Elizabeth Warren dated February 15, 2010.)
For these reasons she is a strong candidate to serve as head of the newly-created Consumer Finance Protection Bureau—and for these reasons, her proposed appointment has generated significant resistance on the part of the financial industry.
Want to learn more?
• Helpful summaries of how the new law affects government, banks, consumers, and investors are offered by the Wall Street Journal, CBS News, and the Christian Science Monitor.
• See the official legislative summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the White House’s description of the goals of the new law.
• Unfinished business: the Brookings Institution lists the important decisions now assigned to regulators.
• Center for Responsible Lending, Americans for Financial Reform and Americans for Fairness in Lending have been strong voices in advocating for economic reforms. Check out their take on the new legislation—what we can celebrate, and what work remains to be done.
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