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Why the Fed Can't Do Consumer Regulation

Back in August I flagged an old Larry Summers lecture arguing that agencies (like the Fed) that keep an eye on bank safety and soundness shouldn't also be tasked with looking out for consumers, since the two mandates can conflict. Summers elaborated on this theme in a speech Friday at the Economist's "Buttonwood" conference:

[A]ny regulatory agency that has as its primary mission the soundness and profitability of the banking system or the financial system cannot be relied on to pursue objectives that are potentially inconsistent with that overall mandate with sufficient vigor. ...

In light of the recent events in the mortgage market, the prevalence of predatory lending practices, the ubiquity of problematic practices in the credit-card market and exploitative overdraft fees, we need a regulator whose mandate is exclusively consumer protection rather than the profitability of particular financial institutions.

That sounds exactly right to me. Unfortunately, profitability--which regulators like the Fed obsess over--is often directly at odds with being straight with consumers. Which makes it hard to believe a safety-and-soundness regulator would spend much time insisting on straightness. (It also makes you wonder why Ben Bernanke is so determined to keep his consumer-regulation portfolio. His predecessor, for one, certainly wasn't very interested in it.)

P.S. For what it's worth, the whole Summers speech is actually pretty entertaining, as these things go. It's built around an extended analogy between financial market regulation and improving auto safety, with Summers endorsing Daniel Patrick Moynihan's approach to the latter.