Do we need to regulate lending with a Financial Products Safety Commission?

There’s an interesting proposal for fixing part of what went wrong in the credit crisis over at Harper’s magazine written by Harvard Law School professor Elizabeth Warren and her daughter Amelia Warren Tyagi, who co-founded the Business Talent Group after working as a McKinsey consultant. The pair co-authored the book The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke a few years ago. Their Harpers piece is behind the magazine’s subscription wall but you can read a summary, cleverly titled “Where are the Subprime Toasters,” at the Columbia Journalism Review by Elinore Longobardi.

The authors note the irony that consumers get better protection from harm when buying a toaster than when borrowing to buy a house. That’s because the Consumer Product Safety Commission, a federal agency, enforces safety standards for toasters, baby cribs and about 15,000 other things consumers buy. There’s no such agency charged with overseeing the “safety” of financial products.

“When a baby stroller or an eyeliner is discovered to be dangerous, it is removed from the shelves,” they write. “Yet financial products go unmonitored for basic safety. When shopping in the complex and constantly evolving financial market, where actual costs and unfavorable terms are regularly concealed, consumers are on their own.”

The article goes on to point out the myriad ways that current rules about disclosure and product marketing have empirically failed to protect consumers — or the entire banking system, at this point — from abusive practices. And the subprime mortgage is hardly the only product to have its shortcomings revealed lately. Don’t forget the auction rate securities mess and improper sales of indexed annuities to senior citizens.

We’ve seen in the comments on prior posts that readers of Investing Insights offer a diversity of views on government regulation and whether more or less is needed in the wake of the credit crisis. So what do you think? Do we need a federal consumer watchdog agency for financial products?

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