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Brains Of The Operation

There's some news buzz around Dick Durbin, Ted Kennedy, and Chuck Schumer's proposal, introduced earlier this week, to create a Financial Product Safety Commission (FPSC) that would regulate, among other things, mortgages, credit, and payday loans to "reduce [their] consumer risk." The Chicago Sun-Times even touted the commission as "Durbin's big idea." But, as Clay Risen noted this morning, the brain behind the idea is Elizabeth Warren, a Harvard professor, bankruptcy expert, and chair of the TARP Congressional Oversight Panel (COP).

In her COP role, which Senate Majority Leader Harry Reid handed her last fall, Warren has been a vehement critic of the U.S. financial regulatory system. She's appeared repeatedly on television as a scrappy consumer advocate, whipping Treasury and big banks around the Beltway while demanding that the government fix regulations to protect the middle class. "I'm not very subtle," Warren told me in a recent interview. "I don't want to sound like Mrs. Warren Goes to Washington, but this is about the people and whether Washington is persuaded that they need to do the people's business." Unsurprisingly, she's become a fast favorite of liberal lawmakers. When she testified at a Senate banking committee hearing in February, she exchanged gleeful waves across the gallery with Chairman Chris Dodd, who later introduced her as "a friend of mine."

Her bully pulpit and influential friends have allowed Warren to push the FPSC. Echoing her initial argument for a commission, articulated in a 2007 Democracy article, the five-person COP issued a report on regulatory reform in January that included the recommendation to "create a single federal regulator for consumer credit products." (The two Republican members, Texas Representative Jeb Hensarling and former New Hampshire senator John Sununu, dissented.) "It is essential that one regulatory agency have the responsibility and accountability for drafting, implementing, and overseeing effective consumer credit product protection rules," the COP report said. "This regulator should assure that consumers are not misled by the terms of the sales pitches for credit products and that they have the information needed to make informed and thoughtful purchasing decisions."

The report explained how the national commission would eliminate disparate state regulations and offered two options for where it might operate: as an "independent regulator within the federal regulatory community" or as part of the Federal Reserve Board--although it notes that the Fed has been "slow to act" on previous regulatory abuses. Were the Fed to establish an FPSC, it "would be required to accept consumer protection as a responsibility that is the equal of its other responsibilities, staff and budget for that function and, makes its operations in the area transparent." Although the COP didn't recommend one option over the other, Warren has said the FPSC should be based on the Consumer Product Safety Commission, which is an independent agency. And ultimately, Durbin, Kennedy, and Schumer have proposed the independent route. This week's bill says the FPSC would be "comprised of 5 commissioners to be appointed by the President" who would be charged with the "sole focus" of consumer safety.

Whether the legislation will find legs and get through Congress remains to be seen. The idea of an FPSC has its critics, particularly among conservatives. "The proposal rests on a fundamentally flawed idea--that lending products can be described as inherently risky and dangerous, or not. That just doesn't seem to be true," says Todd Zywicki, a law professor at George Mason who's testified on the Hill and written scathing criticisms of Warren in The Wall Street Journal and The Washington Times. "Obviously there are lenders and loans that are fundamentally fraudulent. But the more difficult situation that we've seen a lot of in recent years is when certain products are useful in some situations but not in others." Zywicki also said he knows of no "serious academic" who thinks the FPSC "makes any sense at all." (In fact, Joseph Stiglitz recommended the idea in a September article.)

Warren is optimistic that the legislation will pass. "We've moved the ball ninety-four yards downfield, and we're down to the last six yards," she told me. And there is probably House support for it: House Financial Services Chair Barney Frank has indicated he'd back the proposal. But regardless of the bill's fate, one thing's already certain: The commission is Warren's "big idea," and it's helped establish her as Hill liberals' new wonk star.