Zombie Arguments about the CFPB, Wall Street Journal Edition.

In your head, in your heeeaaaadddd….

(Side note:  Would you pay to see a Cranberries cover band? There’s one, Ocean Spray, that occasionally plays in the Mission/Bernal Heights area of San Francisco. I really want to see them; if you see the teenage Konczal please don’t tell him how lame the early 30s Konczal is.)

So there’s some serious zombie arguments – arguments that just won’t die, no matter how much they are dismembered – going on with the Consumer Financial Protection Agency, coming from places like the Wall Street Journal op-ed page. It’s like an Evil Dead movie over at credit slips, where Adam Levitin takes the zombies down one by one. I highly recommend checking it out.

Because at this point I’m familiar with a lot of the disagreements surrounding financial reform and Dodd-Frank.  Do we need to alter the structural nature of financial institutions along size and function, or will capital ratios and maturity mismatch targeting be enough?  Will clearinghouses be able to handle credit derivatives, or do we need to regulate them under stronger, insurance-like, mechanisms?  Was the push towards AAA assets the result of regulatory arbitrage or the shadow-banking demand for “informationally-insensitive” assets?   Will coco bonds solve the TBTF problem, be as ineffectual as preferred stock, or earn the title “death-spiral bonds”?  Will resolution authority simply look like the bankruptcy code with some prompt corrective action attached to it, is that ok, and will the punitive nature of it create incentives towards regulatory forbearance?  I have a sense of these arguments, who makes which cases and the strongest and weakest arguments for each.

But at this point I simply no longer understand the hysterical, off-reality, arguments conservatives, especially the Wall Street Journal’s editorial page, are making about the Consumer Financial Protection Bureau.  Again, if they wanted to argue the meta-level, bring it on. If they think the problem is, a la Phil Gramm, predatory borrowers, say it. If they are freaked out about cost of capital going higher, make that case. I’ve written that the previous attempts to make that case are quite amateur, but I’d love to hear new ones. Anything, really, and I’ll give it a fair listen.

But what they are hustling right now is embarrassing.  There are three main complaints. I highly encourage you to read this by Adam Levitin. They either need to deal with these arguments and move the debate forward or go home.

Quick synopsis of the first two: Is the CFPB unaccountable? Levitin:

CFPB rulemaking is subject to the same Administrative Procedures Act requirements as any other government agency’s rulemaking–namely that there must be appropriate notice and comment opportunities–and it is subject to the same type of judicial scrutiny as any other government agency–Chevron scrutiny. While one might argue that APA and Chevron are an inadequate check on agencies’ actions, that’s not a CFPB problem. That’s a problem with the modern administrative state.

CFPB actually is more accountable for its rulemaking than any other government agency, as it is subject to the Financial Stability Oversight Council’s veto. The CFPB is the only government agency whose rulemaking is subject to a possible veto by other regulators. This means that relative to every other government agency, CFPB rulemaking is more accountable. The WSJ discounts the likelihood of the FSOC veto ever being exercised, but the mere possibility of the veto would have a chilling effect on CFPB rulemaking.

I’ve long said this veto is pretty absurd as far as regulatory bodies go, but legislators wanted political cover for those who might say that this agency has too much power (as in, it’s an actual agency). How’s that cover going!?

Two, the budgeting. There’s actually some really specific thought put into the budgeting of the CFPB:

The design of the CFPB’s funding was very deliberate–and part of a political compromise with Republicans led by Senator Corker. A major concern when designing the CFPB was that if it had to rely on appropriations, the financial services lobby would make repeated pushes to starve the agency into ineffectiveness. Congress, in its wisdom, recognized that as distance grew from the financial crisis, memories of why we need a CFBP would fade (case in point, the WSJ’s). Therefore, it was better to commit to a funding mechanism now that is not so easy to cut off as part of an omnibus appropriations bill.

The idea of funding a financial regulation without appropriations is hardly novel. The OCC and OTS are funded almost entirely by fees paid by banks, and the Fed prints its own money. CFPB could have been funded via direct fees on financial institutions, but there was a concern from WSJ-types that CFPB would levy overly high fees by virtue of a monopoly position. So a compromise was to have it funded by dedicating a percentage of the Fed’s operating budget.

Again, like everything with the budget: if the government should do it it should do it well. If there’s a case that the CFPB is a bad idea, make it. But given that it is what we are doing, given that it is consolidating the functions of many places, it should be appropriately funded.

The third is whether or not Warren should have been consulted by the AG’s.  In what world would you *not* want her consulted on that deal? The third-most cited legal scholar on bankruptcy who has been involved with oversight of TARP and the bailouts since day one strikes me as exactly the kind of person you’d want to consult.