Elizabeth Warren, the chair of the Congressional Oversight Panel (the group keeping an eye on the bank bailouts), has a long post on the Baseline Scenario about President Barack Obama's proposal for a Consumer Financial Protection Agency that would regulate financial products. It's worth reading in full, but I noticed that Warren was incredibly explicit about the problems with the current regulatory system:
For decades, the Federal Reserve and the bank regulators (the OCC and the OTS) have had the legal authority to protect consumers. They have brought us to this crisis by consistently refusing to exercise that authority.
Stephanie Mencimer wrote about this very phenonomon back in January. It's an argument I've heard from economists like Dean Baker: the regulators had the authority to take steps to stave off the crisis—they just didn't use that authority. It's certainly interesting to hear that same argument coming from Warren. She thinks the regulators didn't do their jobs because of "two structural flaws" in the system:
The first is that financial institutions can now choose their own regulators. By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another. The regulators’ budget comes in large part from the institutions they regulate. If a big financial institution leaves one regulator, the agency will face a budget shortfall and the agency will likely shrink. Knowing this, financial institutions can shop around for the regulator that provides the most lax oversight, and regulators can compete by offering to regulate less. Regulatory arbitrage triggered a race to the bottom among prudential regulators and blocked any hope of real consumer protection.
The second structural reason that prudential regulators failed to exercise their authority to protect consumers is a cultural one: consumer protection staff at existing agencies find themselves at the bottom of the pecking order because these agencies are designed to focus on other matters. At the Federal Reserve, senior officers and staff wake up every morning thinking about monetary policy. At the OCC and OTS, agency heads wake up thinking about capital adequacy requirements and safety and soundness. Consumer protection issues are—at best—an afterthought.
Warren thinks that an independent consumer financial protection agency would go a long way towards addressing those flaws. If it somehow gets past industry lobbyists and actually becomes law, we'll get a chance to see if she's right.
UPDATE: There's also a YouTube video, apparently: