Obama’s Consumer Financial-Protection Trump Card: Simon Johnson

Jan. 9 (Bloomberg) -- The biggest news for the Republican presidential-nomination race last week wasn’t the outcome of the Iowa caucuses but the recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau.

Unless you think Rick Santorum can scale up in record time to run a national campaign, the Iowa results just confirmed what we already knew: Mitt Romney is likely to face President Barack Obama in November. The Cordray appointment indicates that the president sees things the same way, and has decided to focus the fight on one of Romney’s vulnerabilities: his views on the financial sector.

The president, of course, can’t make an issue out of too-big-to-fail banks because his administration has helped to solidify their grip on the financial system. The 2010 Dodd-Frank financial-reform law effectively failed to limit lenders’ size, freeing the biggest institutions to grow ever larger. Mega-banks will be harder to deal with, both as healthy institutions and if they run into financial trouble.

Fortunately for Obama, it doesn’t appear that Romney has any objection to “anything goes” in terms of bank size, and isn’t likely to try to make too-big-to-fail an election issue.

Obama will also be reluctant to raise the matter of campaign contributions by bank executives and the political influence that gives them. Both he and Romney are likely to garner roughly equal amounts of cash from the people who run, or benefit from, large financial companies.

Essential Safeguards

But Obama can fight on other grounds, including the issue of consumer protection, by arguing that the pre-Dodd-Frank regime allowed ill treatment or outright abuse of customers by some financial-services firms -- and that the bureau will provide essential safeguards. Cordray’s nomination had been blocked by Republican senators; now Obama can claim he refused to take no for an answer.

Republicans argue that they blocked the Cordray nomination because the design of the bureau is inappropriate. It lacks at least three commissioners and isn’t subject to the congressional appropriations process, they say. Outside Washington, no one cares about this level of detail; the bigger question is whether tighter oversight of financial firms is appropriate.

Of all the Republican presidential candidates, only Jon Huntsman, the former Utah governor and ambassador to China, has the right line on this issue: Embrace it as an essential part of a broader, pro-market approach. Huntsman, for example, pledges on his website that his administration “will direct the Department of Justice to take the lead in investigating and brokering an agreement to resolve the widespread legal abuses such as the robo-signing scandal that unfolded in the aftermath of the housing bubble.”

The financial boom-bust-bailout cycle exposed fundamental problems with the rule of law in the U.S. One example involves property rights -- the ability to own real estate and financial assets without fear of expropriation by powerful interests. There may have been securities-law violations, especially with regard to disclosure of underlying loan contracts and property titles in mortgage-backed securities sold to investors.

Here, too, Huntsman proposes a solution: “If investors’ rights were abused, this needs to be addressed fully. We need a comprehensive settlement that puts all these issues behind us, but any such settlement must include full redress of all legal violations.” Unfortunately, Huntsman’s clear arguments and clever positioning have been ignored by the rest of the Republican field, which mostly confines itself to advocating for repeal of the Dodd-Frank law.

Strange Notion

Newt Gingrich, the former House Speaker, has suggested the strange notion of jailing former Senator Chris Dodd and Representative Barney Frank, though Gingrich may have been joking. Representative Ron Paul is very good on the abusive power of big banks and the general need for property rights. Unfortunately, the Texan is also convinced that government action of any kind must be avoided, and ignores the possibility that powerful people in the private sector can do bad things.

Obama’s secret weapon in hammering home the consumer-protection issue is that the CFPB is not an exercise in excessive regulation. As Bloomberg News has documented, the bureau mounted a charm offensive, before its formal startup last summer, to persuade well-run and honest financial firms to agree to its agenda.

As laid out originally by Elizabeth Warren, a White House special adviser now seeking a U.S. Senate seat in Massachusetts, and implemented by her successor, Raj Date, a former banker, the bureau has focused on bringing transparency to complex financial transactions. Only in America is it controversial to ask that the language in debt contracts be made simple enough that everyone knows what they are signing.

The Cordray appointment enables the CFPB to apply its full regulatory powers over non-bank lenders. Cordray’s status will probably be subject to legal challenges since it’s unclear that his was a bona-fide recess appointment. But any lawsuit would only help make Obama’s political point.

Obama will seek to define Romney as someone who represents financial power and privilege. The CFPB under Cordray will help Obama portray himself as the protector of opportunity and guarantor of credit access for ordinary Americans.

Huntsman could have turned consumer financial protection to his advantage by vigorously campaigning for property rights, as outlined on his website, as part of a genuine pro-market agenda. Romney will prove much more vulnerable.

(Simon Johnson, who served as chief economist at the International Monetary Fund in 2007 and 2008 and is now a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Simon Johnson at

To contact the editor responsible for this article: Paula Dwyer at

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