When she was head of the Congressional Oversight Panel on TARP, her willingness to go after Wall Street, the Treasury Department, and the Fed made her a liberal icon. And her folksy, Midwestern air and her ability to express complex financial issues in simple language turned her into an unlikely media superstar.
Warren is now working to set up the Consumer Financial Protection Bureau, a new government agency inspired by her own work on consumer credit, and in the past couple of weeks almost a quarter of a million people have signed an online petition asking President Obama to nominate her as the official boss of the agency.
The banking lobby sees her as its nemesis, congressional Republicans are openly hostile to her, and conservatives decry her as the exemplary “totalitarian liberal.” At this point, the only way Warren will run the C.F.P.B. is if President Obama makes her a recess appointment, and Senate Republicans have vowed to try to stop even that.
Given the intensely partisan nature of Washington these days, the demonization of Warren and the C.F.P.B. is all too predictable. But it’s profoundly misguided, because Warren is far from the anti-capitalist radical that her critics (and some of her supporters) suppose. Indeed, an empowered C.F.P.B. could actually be a boon to business.
The core principle of Warren’s work is also a cornerstone of economic theory: well-informed consumers make for vigorous competition and efficient markets. That idea is embodied in the design of the new agency, which focusses on improving the information that consumers get from banks and other financial institutions, so that they can do the kind of comparison shopping that makes the markets for other consumer products work so well. As things stand, many Americans are ill informed about financial products. The typical mortgage or credit-card agreement features page after page of legalese—what bankers call “mice type”—in which the numbers that really matter are obscured by a welter of irrelevant data. There’s plenty of misinformation, too... And the consequences of this are not trivial. The housing bubble was a collective frenzy, but it was made much worse by the fact that millions of borrowers were making poorly informed decisions about the debt they were taking on...
The C.F.P.B. hopes to change this, largely by insuring that consumers will be told the true terms of a deal, in a simple and clear fashion. (As an example, it recently released two possible mortgage disclosure forms, and both were two pages long.) This would obviously be good for borrowers. But it would help most lenders, too. For all the talk of the financial industry’s power, its performance over the past decade has actually been dismal. Countless lenders have gone out of business, and many of those still standing saw their stock price decimated after they loaned immense amounts of money to people who couldn’t repay it. The banks thought they were taking advantage of uninformed consumers, but they ended up playing themselves. In a more transparent credit market, almost everyone would have been better off.
While some bankers accept the need for consumer protection, they maintain that the C.F.P.B. will go too far and end up strangling financial innovation. But, over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.” Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.