Bench Memos

Paul Krugman and the CFPB

The January 25 D.C. Circuit opinion striking down President Obama’s non-recess, unilateral NRLB appointments has left the Consumer Financial Protection Bureau’s future greatly in doubt. An invalidation of CFPB director Richard Cordray’s appointment, which President Obama made at the same time, is almost certainly to follow, possibly in the constitutional challenge to the CFPB. Regrettably, that is not the CFPB’s only constitutional deficiency; Czar Cordray’s appointment was made to an unaccountable agency that may legislate as it wishes, free from meaningful forms of government oversight.

These structural constitutional deficiencies—easily as objectionable as the non-recess appointment—are the subject of a constitutional challenge and proposed Congressional reforms, which would (1) bring the CFPB under appropriations control, (2) replace the CFPB director with a five-member board, and (3) ensure that the CFPB robustly take into account safety and soundness concerns. In the New York Times on Monday, Paul Krugman took aim at CFPB reform proponents, claiming they will ensure “that consumers will once again be neglected,” open the bureau “to interest-group pressure,” and “make the agency more or less worthless.”

I can understand that Paul Krugman’s confidence in heavy-handed government interventions might lend itself to supporting the CFPB, but even he should favor bringing the CFPB under more government oversight. While the CFPB’s director is currently a Democrat appointee, wouldn’t Krugman want oversight and accountability when the tables are turned? A five-member commission could at least air the voices of both Republican and Democrat Commissioners, no matter which party is in power. And certainly Republican appropriators might (rightly so) exercise their power to advance their regulatory perspective, Democrats are free to hold them accountable at the ballot box—as a healthy democracy should function.

Krugman believes that instituting government oversight over the CFPB helps big banks. As he argues, “[other] regulatory agencies are basically concerned with bolstering the banks; as a practical, cultural matter they will always put consumer protection on the back burner.”  But this naïvely assumes that a completely independent CFPB is miraculously freed from this big-bank bias. The reality is much different, as I wrote last year: 

The CFPB’s agency biases’ also risks enforcing laws that help special interest groups at the cost of consumers, encouraging regulators to eschew their supposed role of enlightened experts in favor of becoming biased observers. Professor Michael McConnell, quoting James Madison in Federalist No. 62, argued that new regulations can be made “for the few, not for the many.” Industries with the most to lose from expensive regulations also have an oversized influence over the creation of those rules. As C. Boyden Gray explains, regulators also often favor the regulated industry, as a way to secure a high-paying private-sector job after their government service. Even if regulators create laws that can harm businesses, they usually end up only hurting startup companies and small businesses, as larger businesses have more of a cushion to absorb regulatory costs.

While Krugman’s straw man invokes the fear of a mythical Republican push toward unrestrained free markets, America’s consumers should actually be worried about an unrestrained bureaucrat, who may impose his regime as he pleases, without being subject to any real oversight.

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