Today’s absurd William Cohan column actually argues that we don’t need consumer protections in banking—nevermind the subprime explosion, the $8 trillion dollar housing bubble or the 1.2 million foreclosures expected this year. Nevermind the $38 billion in overdraft fees the banking industry reaped in 2009, or the ridiculous fine-print on credit cards. Nope, in William Cohan’s crazy world, the mortgage crisis was basically a problem caused by idiot consumers who—according to Cohan-- don’t even deserve basic legal protections.
Cohan makes only two real points in his column, both of them profoundly stupid. The silliest objection is his obviously disingenuous sticker-shock at the $500-million-a-year budget the new Consumer Financial Protection Bureau will have:
“In an era of huge budget deficits and a depleted treasury, that’s a lot of money for taxpayers to fork over every year to support a new government bureaucracy designed to protect us from our own worst impulses.”
Nobody who knows anything about budgets could be appalled by this number. Even by the standards of government bureaucracy, the CFPB’s funding is paltry. It’s only 10% of the Fed’s annual budget, and about half of the SEC’s. Eliminating or quintupling the CFPB’s funding would be totally insignificant to the overall federal budget. But even if this number did matter, Cohan’s analysis is preposterously short-sighted.
Employing a police force seems like a waste of taxpayer dollars until you get robbed, and so it is with financial regulation. Right now the U.S. economy struggling through a horrible recession, which has included significant government expenditures to bailout Wall Street and keep the job market afloat. All of this was caused by a predatory lending binge financed and implemented by Wall Street. Decent consumer protections would have prevented the housing bubble from getting totally out of control, and would have prevented Wall Street from destroying itself. If it costs us $500 million a year to save 8 million jobs, $8 trillion in household wealth, and $4 trillion in bailout money, that seems like a pretty good deal to me.
This budgetary argument holds no matter who is responsible for the mortgage crisis, be they banks or borrowers, predatory or pristine. But Cohan doubles down on his idiocy, saying that actually, borrowers don’t deserve to be protected from predatory banks.
Like virtually every senseless diatribe against the CFPB written over the past two years, this attack isn’t directed against the CFPB itself, but against the very idea of consumer protection—something that has been a common-sense element of bank regulation for centuries. Things got off track over the past thirty years (with accelerating aggressiveness during the Bush years) as bank regulators simply stopped enforcing consumer protection laws.
The CFPB does not create some wild new standard of regulation—it’s just an effort to ensure that somebody actually enforces the basic consumer protection mandate that existing regulators have ignored. The existing regulators failed, because they’re more worried about short-term bank profitability—the more money a bank makes, the less likely it is to fail, and the less likely that the regulator will be embarrassed by a disastrous bank failure. To existing agencies, it doesn’t matter where that profitability comes from—if it’s from predatory lending, they’ll just look the other way. The CFPB breaks this perverse incentive structure by establishing an agency that only works with consumer protection issues—not bank profitability.
Cohan waits until the final paragraph of his column to deliver the “evidence” for why we don’t need a CFPB, and he gets it completely, horribly wrong.
“Yes, some people who have lost their homes were victims of fraudulent mortgage brokers and shady lenders. But the vast majority of those who held the billions of dollars in mortgages now foreclosed on knew exactly what they were doing. And one of the dirty little secrets of the financial crisis is that one homeowner after another signed mortgage-loan documents that were filled with inaccurate information about his or her net worth, assets, salaries and ability to make monthly mortgage payments. Why would someone sign a loan document knowing full well the information on it was inaccurate and the mortgage could never be repaid?”
The only real statistic on mortgage fraud comes from the FBI, and it doesn’t back up Cohan’s claims at all. As early as 2004, the FBI was warning about an “epidemic” in mortgage fraud—not a few bad apples, not “some people,” but an epidemic . We know that mortgage fraud was standard operating procedure at Washington Mutual, now part of JPMorgan Chase, and they weren’t alone—for five years, rampantfraud was a basic component of the U.S. mortgage machine. And according to the FBI, 80 percent—repeat, 80 percent—of this fraud was perpetrated by the lender.
So, let’s answer Cohan’s question. Why would people knowingly set themselves up for foreclosure? They wouldn’t! The key incentives for fraud and deception do not apply to rational borrowers who want to live in their homes. They apply to lenders, who were being paid very well to push borrowers into unaffordable mortgages. Bankers and brokers were paid kickbacks to steer borrowers into subprime loans, when those same borrowers would have qualified for ordinary mortgages. With heavy demand for mortgage-backed securities on Wall Street, banks knew they could issue garbage loans and stick other investors with the tab—so they did. The list of lenders who pawned their crappy loans off onto other people includes many of the biggest names in finance: Wells Fargo, Wachovia, Citigroup Bank of America, Countrywide, Washington Mutual and more. Banks stood to make a lot of money from fraud. Borrowers, by contrast, could count on foreclosure. Who do you think is going to falsify the income on loan applications?
Sure, there were borrowers who tried to game the system. But the story of mortgage fraud in the housing bubble is overwhelmingly a story of malpractice by bonus-crazed bankers, not borrowers. We need Elizabeth Warren and the CFPB to protect our economy from such abuses. This is a question of basic law enforcement, something Cohan apparently believes should not apply to ordinary citizens looking to buy a home.
