Link to James Freeman’s November 27, 2016 Wall Street Journal Article “Consumer Financial Protection Rewrite: The rogue bureau needs to be reined in if it can’t be killed.”

Election results have created great uncertainty about the future of the Consumer Financial Protection Bureau (CFPB). Having paid close attention to relevant articles, I can say that the editorial board of the Wall Street Journal has displayed a venomous hatred of the CFPB. Below, I will address some genuine constitutional questions about the CFPB, but the Wall Street Journal is wrong about the policy value and policy appropriateness of the CFPB’s actions. 

The Philosophical Basis for Consumer Financial Protection as Part of Limited Government

I can see three principles that can justify consumer financial protection beyond simple contract enforcement: 

Duping people is fraud even if they wouldn’t have been duped had they had infinite time and infinite intelligence. First let me argue that misleading people to their detriment by taking advantage of difficult-to-avoid finite cognition is a form of fraud. (See my post and paper “Cognitive Economics” on the argument that cognition is, in fact, finite and scarce.) Punishing fraud is viewed as a legitimate activity of limited government even in quite libertarian worldviews. For example, I recently read Robert Nozick’s Anarchy, State and Utopia. There, punishing fraud is viewed as something that careful vigilantes can legitimately do (see “Vigilantes in the State of Nature” on Robert Nozick’s views on vigilantes in general), and therefore something that the state can legitimately do. And I don’t think it is ultimately a winning argument to claim that something is not fraud because someone would have realized in advance all the flaws in the product that the seller knew if she or he had spent a wastefully large amount of time investigating something, or had had the acumen of Sherlock Holmes.

Facilitating gain for oneself and harm to others by taking advantage of preexisting confusion is predation of those who are especially vulnerable. A more difficult case than duping people by taking advantage of their finite intelligence and finite time is taking advantage of people who show up already confused. Here the issue is the mental competence of someone to make a particular decision. It is important that people have a decisive way to demonstrate their mental competence so that declaring someone confused doesn’t become a way to sneak in blanket paternalism. Fortunately, economic models identify in their common assumptions what knowledge is crucial for making key decisions. It should be possible to develop online tests of that knowledge that regular people can take (and have a good chance of passing if they are determined to pass) to demonstrate their competence to make complex financial decisions. 

It is legitimate to protect time-slices of people from serious injury by other time-slices of people. In blogging through John Stuart Mill’s On Liberty, I put forward the view that time-slices of individual’s can be viewed as relevant moral units, so that people can be legitimately protected from serious injury by their past selves: 

• John Stuart Mill’s Brief for the Limits of the Authority of Society over the Individual
• The Free Market and Collective Liberty
• John Stuart Mill on Freedom of Contract
• John Stuart Mill on Running Other People’s Lives

The analogy I made was to the rules we have for children. Because most parents care deeply about the welfare of their children, the state should ordinarily show great deference to decisions parents make that affect their own children. But occasionally, a parent demonstrates so little concern for her or his own child that the child must be protected from the parent. Similarly, most people care deeply about their future selves, so the state should ordinarily show great deference to decisions people make that affect their future selves. But occasionally, someone is willing to sell her or his future self down the river. The future self, which is not around to defend her or himself, has a right to get help in trying to deter such an injury.

Refuting Specific Allegations by Wall Street Journal Editorialist James Freeman

On November 27, 2016, James Freeman wrote this about the CFPB:

This lack of accountability has led to outrageous abuses, such as its attempts to regulate car dealers though Dodd-Frank expressly said that wasn’t a job for the bureau. Last year Rep. David Scott (D., Ga.) ripped the bureau’s “deceitful” attack on auto lenders for alleged racial bias based on “shamefully flawed” information. The bureau sued banks for discrimination after guessing the race of borrowers based on their last names and addresses. Internal documents reveal that the bureau gang knew their guesses were wildly inaccurate. So they discussed how to keep defendants they were smearing as racists from learning the truth.

Then there is its attack on payday lenders though government research showed borrowers want such services and suffer when they aren’t available. 

Racial discrimination by car dealers. As I understand it, the CFPB was put in an almost impossible spot by its originating legislation. (1) A legislative carve-out with no principled justification said it had no authority to prevent car dealers from duping people or taking advantage of their preexisting confusion, except that (2) the CFPB was supposed to investigate and work to prevent racial discrimination by car dealers. Finally, (3) the CFPB was prohibited from collecting information on the race of car buyers. What would you do if you had the job of investigating discrimination by car dealers without being able to ask about the race of car buyers is a very difficult task? You would have to use some kind of proxy for race. Using names and addresses could easily be close to the best you could do. (I have a hard time believing that the CFPB would only use last names, though. First names could be quite helpful in guessing race to provide evidence on racial discrimination.) I may be mistaken in my understanding, but if not, the fact that over quite a few editorials I have read in the Wall Street Journal on exactly this topic (of CFPB investigations of racial discrimination in car-buying), the Wall Street Journal never provided the background above is unconscionable. It make the editorials into hatchet jobs, not serious journalism. 

Payday lending. Many who do payday borrowing are not well-informed about the high frequency of people making their financial situation worse by payday-borrowing. This counts as a preexisting confusion that makes the borrower less than fully competent to undertake the contract. Sometimes payday-lenders have key contract provisions that make a lot of money for them to the detriment of the borrower that they try to get the borrower not to pay attention to. That counts as duping the borrower. And sometimes, a payday borrower is, in all knowledge, selling her or his future self out. In all of these three cases, the borrower might well express a desire for a payday loan. So the fact that people say they “want such services” is only the beginning of the argument. It functions only as a reminder of the gravity of making the decision to regulate the purchase of something.  

Indeed, if people are buying something without a gun to their heads, one already knows that they “want such services” in some sense. So there wouldn’t have been any discussion of regulation in the first place unless there was some reason to think regulation was appropriate even if, in some sense, people “want such services.” To put it even more bluntly, is even the most avid regulator ever even tempted to talk about regulating something that no one wants at all, so that even in the absence of regulation none is purchased? 

Constitutional Issues

Other than the possible issue of almost unfireable regional Fed Presidents who have not been confirmed by the Senate voting on monetary policy, the Fed has passed US constitutional muster. So it seems possible that the CFPB could be governed in a similar way without being unconstitutional. The court case against the CFPB in the article linked at the top suggests that if only the Chair of the Fed could vote, the Fed would be unconstitutional too. If that is, so, there could be more people appointed to govern the CFPB, just like the Fed. But in practice, the way the Fed is governed seems quite different in practice from the usual bipartisan board for government agencies. There is a real danger that with more governors the CFPB would become more like other agencies run by a “bipartisan” board rather than like the Fed. “Bipartisan boards” often seem in practice overly politicized, yet without real political accountability to the public because the party generating a result is obscured by the “bipartisan” nature of the boards. 

To me, the constitutional case should involve a close examination of how well bipartisan boards for government agencies actually function. And it should take into account the value of political accountability in that whatever Richard Cordray, current head of the CFPB does, is something that a Democratic president–Barack Obama–is to an important extent accountable for by virtue of appointing Richard Cordray. 

If there is a change to the CFPB’s governance in order to pass constitutional muster, I think it is better to make the head of the CFPB fireable by the President than to go to a bipartisan board or to put it under some other agency that has some other mission. Then the head or acting head of the CFPB still has some capacity for decisive action in an area that I believe still often needs decisive action and at least the measure of independence that comes from a president’s reluctance to have to go through an additional Senate confirmation process for a replacement.  

Update: An In-Depth Reaction from a Reader

Here’s another way to put your point about “infinite time and intelligence”: Pitting an ordinary consumer against a large financial firm that can hire the smartest graduates of Harvard or MIT to design their contracts and web interfaces, is like asking an ordinary tennis player to go up against Roger Federer (worse, actually, because unlike playing tennis, participating in financial transactions is unavoidable). Even if both consumer and firm have to abide by the same laws (“the rules of tennis are the same for Federer and his opponent”), it’s still not a fair contest.  Federer starts with enormous talent and then spends all of his time improving that skill (but, if he’s a bank, he can play a hundred million opponents at once). If there were an argument that enormous benefits accrued to society from having the financial firm (Federer) wipe the floor with the consumer, that would be one thing, but if it’s just a transfer from consumer to firm then it’s closer to theft than to commerce. There’s an interaction between this point and your second point about preexisting confusion. What the clever financial firm can do is to construct a “choice architecture” (otherwise known as a website) that deliberately leads people into making decisions that they don’t really need to make, but that are most likely to exploit areas of “preexisting confusion.” Or, even more perniciously, design their websites in ways that make it difficult for consumers to use tools that could help clear up their confusions or enlighten them about alternatives. In this last category, over the last year there has been a big push by many financial firms to make it hard or impossible for their clients to subscribe to services like Mint.com or Yodlee or Check.me; the banks say it is cybersecurity, but it’s very hard not to suspect that the real reason banks don’t want you to use Mint.com is because Mint.com sends you messages saying things like “hey, your bank just charged you a big fat fee that lots of other banks don’t charge.” In my view, this is one of the biggest consumer protection issues out there, but the press coverage of it has been mostly focused on terrifying people about “here’s another cyberthreat for you to worry about – your kindly bank is generously cutting you off from Mint.com so that the Russians won’t steal all your money.” The truth is that there are straightforward technological fixes to the security problems, but those fixes seem to have been deliberately blocked by specific firms who believe that it would hurt their bottom line to fix the security problems.

Finally, on the supposed constitutional issues. For the reasons you mention and others, making the CFPB head fireable by the President is better than a “bipartisan commission” in which the Democrats appoint commissioners from Goldman Sachs and Citibank while the Republicans appoint commissioners from Merrill Lynch and Goldman Sachs (see: Securities and Exchange Commission).  CFPB has been a pioneer in “evidence based” policymaking and in bringing rigorous analysis to its rulemaking and other processes. The really radical proposal would be to say that if there must be a commission, it should require a PhD in some relevant field and a record of relevant publications in academic journals, and a meaningful scholarly reputation.  Work on consumers’ cognitive processes relevant to financial decisions (e.g., risk aversion) has begun to be published not just in economics and finance journals but in Science and Nature, and the increasing availability of big data in consumer finance means it is increasingly possible to do pretty much unimpeachable empirical research. It’s hard to imagine the constitutional argument against requiring commissioners have relevant expertise.  And there are precedents in other branches of government: the National Science Foundation and the National Institutes of Health and the US Geological Survey are not mostly led by former industry lobbyists or congressional staffers or big campaign contributors.  Certainly, the CFPB should not be dominated by commissioners whose prior careers were entirely in the financial industry, or in politics, which is what would likely happen if some of the “reform” proposals currently circulating were to be adopted.