Bair: Consumers Did Not Understand the Consequences of Subprime Mortgages
In a speech this morning to the National Association for Business Economics at the Washington Policy Conference, Sheila Bair, the chairman of the Federal Deposit Insurance Corp. (FDIC) pushed for consumer protection in financial services, citing "ample evidence that consumers did not understand the consequences of the subprime and nontraditional mortgages that were sold to them." Bair also said that any new financial regulatory reform must include a bridge of information and data between the agencies. In October 2009, House of Representatives lawmakers approved a bill establishing a regulating agency for financial products sold to US consumers – the Consumer Financial Protection Agency (CFPA). Despite mentioning the need for greater protection for consumers, Bair did not mention the CFPA once in her speech. "Economists understand a great deal about the effects of asymmetric information, and how it can prevent markets from existing in the first place or from operating efficiently,” Bair said. “In this light, I think there is a strong case to be made that basic consumer protections help markets function better by reducing information gaps between lenders and borrowers.” But not everyone agrees that the CFPA would benefit all. After the bill was introduced to the House in July, the US Chamber of Commerce reported the CFPA would restrict access to credit for small businesses. Some would lose access to credit altogether. The New York Times reported that a bill from the Senate is expected soon, but the heated and partisan battle over the CFPA’s creation is slowing progress. If formed, Bair said the CFPA and other agencies would “come together to share data and knowledge” while plugging gaps in their jurisdictions. While the CFPA would address exotic products offered from the regulatory periphery, new strategies must be formed to cure problems at the core, such as ending “Too Big to Fail,” Bair said. She called for a pre-funded game plan, similar to the FDIC receivership authority for failed banks, to close large and systemically important firms that fall into trouble. She said this resolution should “not be another bailout mechanism,” and would put shareholders and creditors on the hook for losses – not the public. “We know that a vital and innovative financial sector has long been one of the key competitive advantages of the U.S. economy. But we must also recognize that the excesses of the past decade were a costly diversion of resources from other sectors of the economy,” Bair said. “We must avoid policies that encourage such economic distortions.” Write to Jon Prior.