In creating consumer financial regulatory agency, there are no guarantees

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, March 22, 2010; A15

In the debate over how to structure a new regulatory agency to protect consumers of financial products, history offers a lesson:

There's no way to ensure, by virtue of the agency's structure, that a regulator will do a good job or be free of political interference.

Advocates for workers, for example, cheered the creation of the Occupational Safety and Health Administration in 1970 because it was placed in the Labor Department, which they viewed as a bastion of pro-union activity.

Two years later, consumer advocates celebrated the fact that the new Consumer Product Safety Commission was independent of any other federal agency.

In the years that followed, presidents and Congress tinkered with the agencies, and each had structural flaws and limitations that ended up making it a disappointment to the advocates who had crusaded for its creation, according to historians of regulation.

"Congress has always been under pressure from powerful interest groups to design these things in ways that take out some of the force and power of the regulator," said Terry Moe, a professor of political science at Stanford University.

The question of structure resonates today as Congress debates how to set up a new consumer financial regulatory agency. A proposal for such an agency was a landmark piece of the Obama administration's proposal for financial regulatory reform.

The administration has proposed -- and legislation that has passed the House includes -- an independent agency to protect consumers from abuses in mortgage, credit card and other forms of lending.

But in the face of opposition from the financial industry, some Republicans and some moderate Democrats, the legislation introduced last week by Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, would park this agency as a "bureau" inside the Federal Reserve.

But aside from placing the consumer regulator inside the Fed, the Dodd bill preserves many of the independent features contained in the administration's original proposal, such as a chairman appointed by the president.

Consumer advocates are outraged over the idea of placing the consumer regulator in the Fed. For starters, the Fed had a poor record of protecting consumers from lending abuses in the years leading up to the financial crisis. Consumer advocates say consumer regulation needs to be totally independent from the Fed, which is close to the nation's biggest banks.

Michael Ting, an associate professor of political science at Columbia University, agreed that housing the consumer regulator at the Fed carries risks. But, he added, "there are limits to this logic." Ting points out the Fed has advantages in recruiting, expertise and, perhaps, funding. "A well-designed office within the Fed could certainly be superior to an under-financed independent agency," Ting said.

Both models for regulatory agencies -- even if initially celebrated by advocates for increased regulation -- have had limits to their effectiveness.

One of the biggest for the Occupational Safety and Health Administration was that states could pre-empt many of the regulator's rules.

And the Nixon administration, friendly to business, kept on weakening and decentralizing OSHA through its network of political appointments, according to research by Stanford's Moe.

The Consumer Safety Products Commission, meanwhile, withered in the years after its creation. The commission was required to submit its proposed rules to Congress in advance of adopting them, giving business and political interests a chance to weigh in. Congress required the commission to focus on voluntary standards rather than mandatory standards.

"It's always difficult to regulate a well-heeled industry on behalf of consumers," Ting said. "Regardless of the organizational form, it would probably take the right combination of funding, oversight, professionalism and, ultimately, voter support to get it right."

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