by Jeff Reeves | June 9, 2011 1:24 pm
As I continue digging into my notes from the Personal Finance Online Summit at the White House on Wednesday, there’s plenty of “fluff” from top Obama Administration officials just trying to get a political point across.
But there was a great deal of substance, too – and one of the things I am increasingly impressed with was the face time I got with Elizabeth Warren, expected to be the first director of the Bureau of Consumer Financial Protection.
I know a lot of fiscal conservatives are skeptical of government regulations, and many more are skeptical of “nanny state” interference under the guise of helping consumers. But after meeting with Warren, I believe she has the best interests of the economy at heart and isn’t just creating another bureaucratic octopus meant to mire businesses in more meaningless regulation.
Here are three reasons that make me trust her – and I urge the president and Congress to appoint her to lead the Consumer Financial Protection Bureau as soon as possible.
1. We Desperately Need Trust in the Financial Sector
Perhaps the most compelling reason to have faith in Elizabeth Warren’s mission is the simple fact that nobody trusts banks. Investors think that “mark-to-market” antics have made bank balance sheets completely opaque, taxpayers remain livid over too-big-to-fail bailouts and the prospect of higher bank fees has consumers worried about the impact on their family budgets.
Nobody likes banks. And unless we mend that trust, the economy will have trouble achieving its full potential.
Warren likened the need for comprehensive regulatory reform to the foundation of the Food and Drug Administration at a time when patent medicine and bathtub elixirs made healthcare quite chaotic.
“Before the FDA owning a bathtub and seven boxes of chemicals meant you were a pharmaceutical company, and could put anything out that you claimed.” Warren said. “So the FDA says ‘if you make aspirin, it has to be aspirin.’ Who did that work for? It didn’t work for those who were selling snake oil, folks who said, ‘we’ll put it in a bottle and hope it doesn’t hurt you.’ But it didn’t hurt people. It actually worked and consumers learned they could trust drug companies.”
After that trust came big economic growth – not just in the development of new treatments that gained the full faith and backing of the government and its citizens, but through a host of innovations that led to big profits for those who were willing to put a consumer-first approach on medicine. Warren cited the easy-open pill jars, pills with special coatings for sensitive stomachs and flavored medicine for the kids all as very profitable innovations — with a consumer face.
The lesson? If you use the government to build consumer trust in a crucial service, not only will you make people feel better about spending money in that sector but you encourage innovation in new products – so long as they are within the rules.
It’s a fascinating parallel, and one worth exploring. Trust and faith in lenders is crucial to individual consumers and to the broader economy, and there is an acute lack of trust at the present time.
2. Warren Favors Free Markets, Especially in Finance
When I got my turn to ask Warren a question, however, I had to advocate on behalf of investors. After all, this site is InvestorPlace – not ConsumerPlace. As an individual investor myself, I’m quite concerned with the anemic performance of financial stocks, and the lack of lending and revenue growth for these important companies that drive much of our economy. So I addressed the concerns of the bank investors I represent head on:
“With bank revenues still hurting and all the uncertainty in sector, some think that limits on fees or regulations on products will hurt financial stocks even more,” I said. “What do you say to people who think that strict consumer protections and a successful financial sector are mutually exclusive?”
The Oklahoma City native’s candid response: “Poop.” (Apologies to the aide who tried to wave me off when I asked Elizabeth Warren if I could quote her on that – the meeting was on the record!)
But after that folksy charm to disarm the question, Warren went on to tell an important anecdote of a meeting before the House Financial Services Committee where Ed Yingling, president and CEO of the American Bankers Association, admitted that there were some financial instruments that should be outlawed outright to prevent misuse at banks.
But when Warren got her turn, she suggested Congress not just treat the symptoms – but the cause.
“I said I’d really like to try a competitive market first. We lived in a world where disclosure became an ugly term, and it turned into a million words on paper constructed by a lawyer. But we really haven’t tried real disclosure.”
The idea of a “zero sum game” where you have to outlaw the worst financial instruments or force banks to lose ground for consumers to gain ground is an oversimplification that serves no one, Warren told me.
“It’s not good for it to be industry vs. consumers,” she said. “Competitive markets work well for consumers and for competitors who offer products the consumers want. And they do not work for those who build business models around fooling people.”
That makes sense for both Wall Street – and Main Street.
3. What Some Banks Lose, Others Will Gain
As she addressed members of the finance summit further, Warren zeroed in specifically on the ins-and-outs of the financial sector and its recent lack of competitiveness due to the size and scale of behemoths like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and others.
“In a noncompetitive market, (small banks) are competing with issuers who appear to be much cheaper. Community banks lost lots of business to mortgage brokers down the street giving a much cheaper product,” Warren said. She added that they had little choice but to throw their hat into the subprime mortgage mess by offering loans consumers thought were a better deal “but risk-adjusted, were not a cheaper product at all.”
If prices are clear up front, and back-end fees or warnings of high risk are not tucked under the rug, then smaller financial stocks actually gain a big competitive advantage. It’s no longer just the reach you have – but the value you can provide to an individual consumer.
What’s more, simplified mortgage documents and processing will enable banks with smaller loan departments to do more with less. Paperwork will be “cheaper to process, cheaper to fill out, and cheaper for regulators.”
True, the big banks with their big lobbies may not like some of these moves. But there are a host of smaller, publicly traded banks out there – not just private credit unions – that will gain a competitive advantage if Warren’s aims are achieved.
Bottom line: There are always reasons to be skeptical of governmental interference. And with many banks off 20% or more so far in 2011 despite gains for the broader market, it would appear that this is not the time to mess with their revenue streams.
But I believe that the idea of building trust through regulations, as the government did with the FDA, is crucial in these times when lenders are seen by many as an economic ill and not our economic solution. I also believe that the idea of a true free market based on more information will help not just consumers, but smaller banks that have trouble competing with the big guys in the current model.
“We live in a world where ‘disclosure’ became an ugly term and it turned into a million words on paper constructed by a lawyer,” Warren told me. If she can change that so consumers clearly know what they’re buying, and even small banks can compete to provide a good deal, everyone wins.
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