Consumer Protection and The Fed: A Bad Idea

The debate on Capitol Hill has been centered around whether or not Elizabeth Warren is the right person to head the new Bureau of Consumer Financial Protection. Economist Simon Johnson has been leading the chorus for Warren's candidacy, and in her speeches she seems to pay homage to the right themes. Who heads the agency is somewhat of a red herring; there's a bigger issue. The new consumer agency will be housed in the Federal Reserve Bank, and it will have a blank check as to the extent of its funding. That is a genuinely bad idea.

While the Fed has bank oversight in its charter, the key mandate for a central bank is to provide stability and liquidity to the banking system through monetary policy instruments that serve to maintain a stable currency. Over time, the mandate has been commingled with that of choosing a monetary policy path that keeps output close to potential. The most politically oriented discussions around the Fed have centered on its role vis-a-vis full employment and output growth. Until recently, the Fed has been able to maintain its independence around these aspects of its charter.

If the new Bureau of Consumer Financial Protection were housed and insulated within the Fed structure, it would bloat and dilute its charter. In addition, the new agency would be outside the purview of Federal Reserve regulation and control. This is a perfect situation for Congressional and Presidential meddling with no accountability. Since financial services are our biggest growth industry, the budgets and ambit of the new watchdog would expand uncontrollably over time.

St. Louis Federal Reserve President James Bullard is quoted by Dow Jones as saying, "The Fed's only engagement with this independent agency is to fund it." This is a bad idea for the Federal budget and a very bad idea for the continuing independence of the central bank. Let's focus on issues and stop focusing on personalities.