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Summers On Consumer Financial Regulation

Judis is disappointed that Tim Geithner didn't chew out Ben Bernanke for refusing to give up the Fed's role in regulating consumer financial products. I agree--I wish Geithner would have reamed out Bernanke the same way he reamed out critics of the plan to have the Fed handle systemic risk regulation. But it's worth noting that at least one top administration official is on record strongly supporting an independent consumer financial products regulator. Back in April of 2008, before he became an Obama adviser, much less a top White House official, Larry Summers shared his thoughts in a lecture he delivered at Yale:

Second, there's an overwhelming case for stronger consumer regulation in all financial areas. If one studies carefully the extent to which subprime mortgages at egregious interest rates were taken on to help people get out of credit card debt at super egregious rates, one has a sense of the greater complexity of the problem and the need to view it from an integrated consumer perspective. ...

So, the central bank should be crucially involved in the regulation of major financial institutions. That--it's a--if you believe in regulations that are pursuing objectives that are not immediately in the interest of financial institutions--If you believe in those regulations--consumer regulations, community regulations and the like--If you believe in those regulations and you want them carried out with vigor, you need to give them to their own regulator, who is not responsible for the health of the institutions in the way that the Federal Reserve is.

It's actually a somewhat subtle point: There are certain types of regulations the Fed should enforce, both because it and the banks have a shared interest in their being effective, and because the Fed is uniquely positioned to get the information you'd need to enforce them. (These would be the sorts of regulations that, in a nutshell, prevent banks from imploding under stressful conditions.) On the other hand, there are certain types of regulatory functions that should be kept as far away from the Fed as possible because the banks will fight them tooth and nail, and because it would be impossible for the Fed to carry them out and still maintain the working relationship it needs to fulfill its central-bank mandate.

I'm not sure it always works out this cleanly in practice (I doubt Summers thinks so either). But the intuition is right on target.

--Noam Scheiber