AMERICAN ISSUES PROJECT

I am often vexed lately when reading what our government is doing. On the one hand, I find it hard to fault the intentions of those who wish to make our lives "easier." On the other hand, I want to throttle them for insulting my intelligence by proposing to do something for me that any reasonably aware 10 year old should be able to do for himself.

If the modern welfare state teaches us anything, it is that we must be cocooned and protected as if we were a newborn babe, or prevented from harming ourselves because we're too stupid to know any better. It's not enough that government warn us that the stove is hot. They must put on oven mitts for us and then place a 10 foot high sign in front of our face telling us not to touch anything.

I get this feeling of being patted on the head and told I'm a good boy when reading about the brand new Consumer Finance Protection Agency (CFPA) - another in a long line of alphabet soup government watchdog agencies who are ostensibly set up to protect us from rapacious corporations who would do us harm. And, as you might have guessed, the CFPA has also been constituted to protect us from our own stupidity.

In this case, it will be financial products from which we will be spared the consequences of any irresponsible, ill-informed decisions we might make. The stated reason is to prevent another financial meltdown like the one that occurred a year ago. But as Katherine Mangu-Ward writing in Reason Magazine asks, does that include payday loan outfits too?

In contrast to the complex instruments that helped bring about the financial crisis, payday loans are astonishingly low tech: Applicants bring in a stack of paper showing that they have a job and a bank account, write a paper check in a physical store for the amount they will owe when the loan comes due, and walk away with a handful of cash. These localized, low-key transactions are hardly the stuff of innovative high finance, but that hasn't stopped Congress and the president from purposefully conflating ordinary, everyday financial practices they deem unsavory with those that caused a global financial meltdown.

This is a perfect example of Uncle Sam believing we are all toddlers and need the protection of mummy and daddy from doing something that requires an iota of thought. Payday loans are the least complicated, most upfront financial transaction you can imagine with the possible exception of putting a dollar into a vending machine for some Fritos. The consumer must choose to get into trouble all by themselves - no unscrupulous businessman is necessary in that equation.

Not paying off your debt has consequences whether you're borrowing $200 from the local Cash Store for an emergency or $200,000 from Countrywide Financial for a house. The problem with agencies like CFPA is that they don't differentiate between the two. To government, both are part of the same problem; consumers who are "taken" by greedy businessmen.

I hate to break it to our Mother Hen regulators, but anyone who would sign their name to a loan that they have not examined as far risks are concerned, or take on terms they may not be able to meet, or do not understand these risks and terms and fail to ask for clarification, they deserve exactly what that kind of irresponsible individual behavior merits; foreclosure or bankruptcy. If the individual selling the mortgage is misleading the applicant, or lying to them, there are laws already on the books to deal with crooks like that. The victim also has legal redress in such cases to recover any losses.

This is not good enough, says government. Hence, we are saddled with the CFPA and its aggressive enforcement of its standards that will grade financial products based on how easy it is for a consumer to understand them. A financial services employee who sells the consumer a product that the government thinks the buyer doesn't understand properly could lead to hefty fines and even jail time for the employee.

To make matters worse, the CFPA chief would have enormous powers to mete out punishment to transgressors; sort of like a Super-Daddy on steroids:

Though two oversight panels would advise the new director, he or she would not have to follow their recommendations and instead would have a far-reaching mandate to address unfair, deceptive and abusive practices.

The director "has unfettered power to regulate, investigate, prosecute, try and sentence," said William Isaac a former Federal Deposit Insurance Corp. chairman, who is now the chairman of LECG Global Financial Services.

If you get the wrong sort heading up the CFPA, the potential for far reaching corruption would be possible. A political partisan in that position could reward their friends and punish enemies, while making a cruel joke of their consumer protection mandate.

And that mandate would be extensive. It is estimated that 80% of bank depositors would fall into the CFPA's tender embrace, although most "community banks" would be exempt from the bulk of the regulations. Complaints against these smaller banks would still be investigated but the agency would not have the statutory authority to directly examine their product lines and business practices.

All in all, there is little doubt that the real target of the CFPA is risk taking; the act of faith made by entrepreneurs and venture capitalists who have a dream about building something tangible from nothing. Or the investor who wishes a better return on their money and is willing to gamble to get it. It is this kind of innovation that fuels the economy that will be stifled under this new agency.

The CFPA will no doubt receive the plaudits of those who look upon consumers as sheep, and businesses as evil shearers. But I can't help but look at this agency and ask; what has happened to personal responsibility? Is it desirable to remove almost all risk from investing?

The answers to both of those questions lie in a government who mistakes itself for a knight protector of children and other weak folk who they believe are at sea when it comes to making their own self interested decisions about their financial lives.

Rick Moran is the Chicago editor of Pajamas Media, an associate editor of American Thinker and the proprietor of the blog Rightwing Nuthouse.

Posted 10-27-2009 12:01 AM

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