The Consumer Financial Protection Bureau had noble aims, but it was doomed by a structure that made it inherently political.
Conceived as a government watchdog with noble aims, the CFPB was doomed by a structure that made it an inherently political agency.
On October 11, 2016, in PHH Corp. v. Consumer Financial Protection Bureau, a three-judge panel of the D.C. Circuit Court of Appeals found the CFPB’s structure unconstitutional and “fixed” it by empowering the president to remove the agency’s director at will.
Sounds dull, but this is a tragic story.
In 1988, during my first year of law school, I met a young professor named Elizabeth Warren. She was like a tornado — energetic, fascinating, and scary. She was also a Republican.
Despite that last bit of trivia, she hadn’t changed much when Americans began to notice her two decades later.
In fact, a Reagan Republican might have written her 2007 article “Unsafe at Any Rate,” which proposed a new regulatory agency to help consumers understand credit products by simplifying disclosures and ending deceptive industry practices.
Free-market economists would approve of her rationale for a “Financial Product Safety Commission:”
To be sure, creating safer marketplaces is not about protecting consumers from all possible bad decisions. . . . Terms hidden in the fine print or obscured with incomprehensible language, unexpected terms, reservation of all power to the seller with nothing left for the buyer, and similar tricks and traps have no place in a well-functioning market. . . . When markets work, they produce value for both buyersand lenders.
But the basic premise of any free market is full information.
When a lender can bury a sentence at the bottom of 47 lines of text saying it can change any term at any time for any reason, the market is broken.
Over the next two years, the economy collapsed, Democrats gained control of Congress and the White House, and Warren grew famous criticizing big banks in congressional hearings.
She lobbied Democrats to include her agency in their Wall Street–reform legislation, arguing that effective enforcement of consumer-protection laws required a regulator independent from politicians beholden to the financial industry.
The Democrats had a better idea:
They would make her agency independent from Republicans.
Circumventing the Constitution took two steps.
First, Democrats inserted a few clever workarounds into the Dodd-Frank Act, which created the CFPB on July 21, 2010. Commissions such as the one Warren first proposed are ostensibly bipartisan, so a president-appointed director would lead the new agency. Since there might be a Republican president one day, the director would be practically irremovable after Senate confirmation to a five-year term that could extend indefinitely until the next director’s confirmation. To prevent future Republican-led Congresses from cutting the bureau’s budget, funding would be guaranteed through Federal Reserve profits rather than taxpayer dollars.
Next, the enlarged new agency would be staffed with Democrats, top to bottom.
There would not be a Republican director nominee for at least five years, and if one was ever confirmed, entrenched left-wing managers could undermine “attempts to weaken consumer protection.” The plan wasn’t perfect, but it was pretty good.
Warren, who had hoped to be the CFPB’s first director, led the one-year agency-building process. She chose loyal Democrats to be her senior deputies; they hired like-minded middle managers, who in turn screened lower-level job seekers. It was too risky for interviewers to discuss politics, so mistakes were possible.
I was one of them.
As a Jewish graduate of a liberal college living on Manhattan’s Upper West Side, I fit the stereotypical Democratic profile. In fact, my primary influences were my business-school professors at the University of Chicago, the epicenter of free-market capitalism. I supported the agency Warren proposed in 2007 for the same reason I had worked at the Securities and Exchange Commission — accurate information improves markets’ efficiency.
I had not read important sentences at the bottom of the Dodd-Frank Act’s thousands of lines of text.
In March of 2011, I interviewed with Richard Cordray, the pre-operational agency’s new enforcement chief. By May, I had surrendered my prized rent-stabilized apartment and moved to Washington to be the CFPB’s 13th enforcement attorney.
I would not have been so lucky two months later. As screening techniques improved, Republicans were more easily identified and rejected. Political discrimination was not necessarily illegal, but attempts to hide it invited prohibited race, gender, religion, and age discrimination. In retrospect, the Office of Enforcement’s hiring process, which was typical for the bureau, violated more laws than a bar-exam hypothetical.
The most common, “I don’t think he believes in the mission” was code for “he might not be a Democrat.”
Free men engaged in free enterprise build better nations with more and better goods and services, higher wages and higher standards of living for more people. But free enterprise is not a hunting license.
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