Dean Baker
TPMCafé, July 16, 2010
See article on original website

The Huffington Post is reporting that Treasury Secretary Timothy Geithner is trying to nix Elizabeth Warren's appointment as the head of the Consumer Financial Protection Bureau that will be created by the financial reform bill. If this is true, President Obama must override his Treasury Secretary.

While the reform bill does improve regulation in many ways, it does not fundamentally change the way Wall Street works. Goldman Sachs, Citigroup and the rest will be doing business pretty much the same way the day after reform as they did the day before reform. The one clear substantive gain was the creation of a strong and independent consumer financial protection bureau. Elizabeth Warren is the obvious person to head this new agency; there is no close second.

To start, the idea for this sort of consumer protection board originated with Warren and her writings. She made the obvious point that we don't allow businesses to sell exploding toasters, why should we allow them to sell exploding mortgages? (For opponents of government bureaucracy, this could be dealt with by making bad contracts unenforceable, but our courts do not see things this way.)

Ensuring that mortgages and other financial products are clearly written and include reasonable terms not only protects consumers, it will also make the financial sector more efficient. Why would we want financial engineers wasting their energy developing deceptive contracts? If they can't market them to consumers, then they won't write them up.

In addition to coming up with the idea for the agency, Warren has also been its most vocal advocate. She has written and spoken extensively on the issue ever since the start of the mortgage crisis.

Warren has also displayed the sort of independence that will be needed to get the new agency on a solid footing. She used her position as head of the Congressional Oversight Panel for the TARP to thoroughly scrutinize the deals made as part of this program and to point out all the ways in which taxpayers were not getting a fair deal for their money.

Undoubtedly her actions made many people in positions of power uncomfortable. But, that is exactly what we need in order for the new consumer protection agency to be effective.

The Federal Reserve Board already had the power and the responsibility to do the job that the new consumer board has been assigned. The problem was that Ben Bernanke, Alan Greenspan, and their colleagues on the Fed board (with some notable exceptions) never took this responsibility seriously. As a result, consumer protection was a joke.

Shifting the responsibility to a new board does not by itself guarantee that consumer protection in financial matters will now be treated seriously. Just ask the folks at the Mineral and Management Service about their oversight of deep-sea drilling.

Ensuring that the new board carries through its responsibilities in the way that is intended will require a leader with integrity, intelligence and independence. Elizabeth Warren clearly fits that description. Selecting anyone else will be an insult not only to her, but to all the individuals and organizations who worked so hard to bring the Consumer Financial Protection Board into existence.