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Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009

Lombard Street, Vol. 1, No. 12, September 14, 2009

George Mason Law & Economics Research Paper No. 09-48

27 Pages Posted: 18 Sep 2009  

Joshua D. Wright

George Mason University - Antonin Scalia Law School, Faculty

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: September 15, 2009

Abstract

The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

Keywords: Barack Obama, behavioral economics, credit cards, Elizabeth Warren, Federal Trade Commission, Financial Regulatory Reform, Michael Barr, new paternalism, Oren Bar-Gill, plain vanilla, regulation, White Paper

JEL Classification: D18, E50, E58, G18, G24, G28, G38, K22, K23, L44, L51, R38

Suggested Citation

Wright, Joshua D. and Zywicki, Todd J., Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009 (September 15, 2009). Lombard Street, Vol. 1, No. 12, September 14, 2009; George Mason Law & Economics Research Paper No. 09-48. Available at SSRN: https://ssrn.com/abstract=1474006

Joshua D. Wright (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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