Senator Elizabeth Warren (D-Mass) believes that without rules and accountability, financial markets do not work. She is proposing steps to complete the “unfinished business of financial reform and regulation of financial markets.”
In prepared remarks for an appearance before the Levy Economics Institute of Bard College's 24th Annual Hyman P. Minsky Conference, Warren called out Republican lawmakers for “pushing for an anti-market agenda” by “trying to hamstring” the Consumer Financial Protection Bureau via slashing its funding, reducing its jurisdiction, and restricting its enforcement authority, all steps that Warren said “would undermine the market by taking financial cops off the beat.” Republicans also “rammed through” a repeal of the Dodd-Frank Act’s swaps pushout provision, undermining the market by “handing out taxpayer subsidies to a handful of the biggest banks on the planet and giving those banks a tremendous advantage over their smaller competitors who just don’t get that kind of subsidy.”
Without financial cops, “companies could out-compete one another not by creating value, but by cheating their customers,” Warren said. To press home her point, the legislator discussed the deregulation that started in the 1980s. “Not long after the cops were blindfolded and the big banks were turned loose, the worst crash since the 1930s hit the American economy—a crash that the Dallas Fed estimates has cost a collective $14 trillion,” she said.
Basic principles. Rules are necessary but must promote innovative and competitive markets, Warren said. To make sure that rules do just that, two principles should be applied. First, financial institutions should not be allowed to cheat people. Markets only work if consumers can see and understand the products they are buying. Second, financial institutions shouldn’t be allowed to get the taxpayers to pick up their risks.
Warren said that judged against these principles, the Dodd-Frank Act “made some real progress” but there is more to be done.
Proposals. Warren discussed several proposals to complete what the Dodd-Frank Act started. She noted that the Dodd-Frank Act’s creation of the CFPB was “a powerful step toward honest markets that do not cheat consumers. In the four years that it has been operating, the “little consumer agency” has already “forced financial services companies to return more than $5 billion directly to consumers that they cheated.”
While the bureau’s work in the mortgage, credit card, student loans, and other products is “headed in the right direction,” Warren said the “the auto loan market looks increasingly like the pre-crisis housing market, with good actors and bad actors mixed together.” The lawmaker noted, “Auto dealers got a specific exemption from CFPB oversight, and it is no coincidence that auto loans are now the most troubled consumer financial product.” Congress should give the CFPB the authority it needs to supervise auto loans, she said.
- strengthening legal accountability for big financial firms and senior executives;
- breaking up the big banks and restricting the Federal Reserve Board’s emergency lending authority;
- changing current tax laws that encourage excessive risk-taking and discourage long-term growth; and
- regulating the shadow banking sector.
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