Tag Archives: regulation

The Money Problem

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Professor Ricks

I recently read The Money Problem: Rethinking Financial Regulation by Morgan Ricks (University of Chicago Press 2016).  While it is not a book for the financially faint of heart, it does provide a great introduction to what money is and what banks and other financial intermediaries do. The back matter reads,

Years have passed since the world experienced one of the worst financial crises in history, and while countless experts have analyzed it, many central questions remain unanswered. Should money creation be considered a ‘public’ or ‘private’ activity—or both? What do we mean by, and want from, financial stability? What role should regulation play? How would we design our monetary institutions if we could start from scratch?

In The Money Problem, Morgan Ricks addresses all of these questions and more, offering a practical yet elegant blueprint for a modernized system of money and banking—one that, crucially, can be accomplished through incremental changes to the United States’ current system. He brings a critical, missing dimension to the ongoing debates over financial stability policy, arguing that the issue is primarily one of monetary system design. The Money Problem offers a way to mitigate the risk of catastrophic panic in the future, and it will expand the financial reform conversation in the United States and abroad.

I particularly recommend Part I to those trying to get their hands around money (the concept, not hard currency itself) and how it is created. Ricks reviews the “standard textbook description” of bank money creation and others’ account of it before providing his own “modified story.” (58-59)

Parts II and III provides a far-reaching blueprint for reforming the monetary system.  This reform agenda is not without its critics, but I think Ricks gives a fair reading to competing views so you can make up your own mind as to who is right.

Gorsuch and the CFPB

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photo provided byUnited States Court of Appeals for the Tenth Circuit

Judge Gorsuch

Bankrate.com quoted me in Supreme Court Pick Could Spell Trouble for the CFPB. It opens,

President Donald Trump’s first Supreme Court pick has been identified as the “most natural successor” to the late Justice Antonin Scalia, whom he would replace.

Neil Gorsuch, 49, a judge on the 10th Circuit Court of Appeals in Denver, is said to share many of Scalia’s beliefs and his judicial philosophy. That could tip the high court back toward the 5-4 conservative split it held during controversial cases prior to Scalia’s death, although Justice Anthony Kennedy will remain a liberal swing vote on certain social issues before the court.

Gorsuch’s big judicial decisions have favored religious freedom over government regulation and state’s rights over the power of the federal government.

But how might that impact consumers or their wallets directly?

“I think with a judge like Gorsuch, you can see there probably will be a tendency in that direction to dissuade innovation,” says David Reiss, a law professor at Brooklyn Law School and the academic program director for the Center for Urban Business Entrepreneurship.

That could mean the Consumer Financial Protection Bureau, whose unique management structure a judge on the U.S. Court of Appeals for the D.C. Circuit last fall called unconstitutional, could face an obstacle on the bench should the legal fight over its construction ever reach the Supreme Court.

Judge Brett Kavanaugh, who wrote the majority opinion for the D.C. circuit panel, said because this independent agency is headed by a director whom the president cannot fire at will – and not, say, a set of commissioners like other agencies within the government – it is a threat to individual liberty.

“In short, when measured in terms of unilateral power, the director of the CFPB is the single most powerful official in the entire U.S. government, other than the president,” Kavanaugh wrote. “In essence, the director is the president of consumer finance.”

How Gorsuch May Rule

Supporters of the bureau are trying to get a hearing before the full U.S. Court of Appeals, but the issue could well wind up in front of the U.S. Supreme Court – that is if Congress doesn’t take action first.

Legal scholars say should Gorsuch win Senate confirmation he is unlikely to look favorably on the bureau’s structure.

Indeed, Gorsuch is likely to “echo the views of Judge Kavanaugh,” Melissa Malpass, senior legal editor for consumer regulatory finance at Thompson Reuters Practical Law, said in an email.

“Judge Gorsuch, through recent decisions, has expressed his disfavor with permitting government agencies to not only determine what the law is, but also to interpret and re-interpret the law as they see fit, often based on the political climate,” Malpass says.

If the Supreme Court were to uphold the Kavanaugh ruling, it “may, in effect, destroy the CFPB as we know it, and that will have an effect on consumers,” Reiss says.

Not everyone, though, thinks restructuring the CFPB as a commission-led agency like the Federal Communications Commission, for example, would be bad for consumers.

Gorsuch’s Path to the High Court

Democrats, still stung over the Senate’s refusal to consider Merrick Garland, then-President Barack Obama’s pick to succeed Scalia, could try to block Gorsuch’s nomination. Under current Senate rules, at least eight Democrats will need to cross the aisle to prevent a filibuster of the appointment.

Gorsuch, who was confirmed for his current post in 2006 by Senate voice vote, has won widespread acclaim in Republican circles. He also received a vote of confidence from a former Obama administration official.

“I think the Democrats are going to ask questions to determine if the nominee is outside what they call the political mainstream,” Reiss says. “We know this battle will be a brutal one, almost definitely because of the treatment of Merrick Garland’s nomination under the Obama administration.”

Consumer Protection Changes in 2017

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hand-1592406_1280

Business News Daily quoted me in 6 Big Regulatory Changes That Could Affect Your Business in 2017. It reads, in part,

It’s a new year and there’s a new incoming administration. That means there are likely some big-time regulation changes in the pipeline, not to mention changes that were already on the agenda. Some proposals will fail, while others will pass, but all of them could significantly affect your business in 2017 and beyond.

Top of the list this year are the potential repeal of the Affordable Care Act, the currently suspended change in Department of Labor overtime regulations, and minimum wage or paid sick leave efforts at local and state levels. However, there are a bevy of other potential changes on the horizon that the savvy entrepreneur should be aware of as well.

Here are some of the proposals we’re keeping an eye on this year, and how they might affect small businesses.

*     *     *

3. Consumer Financial Protection Bureau (CFPB) arbitration rules

Proposed rules from the federal CFPB would prohibit what are known as mandatory arbitration clauses in financial products. Those clauses essentially prevent consumers from filing class-action lawsuits against the company in the event that something goes wrong. The rules would instead leave people to litigate on their own, a time-consuming, costly endeavor that often has very little payoff in the end.

“It is expected that the Obama administration will issue the final rule before President-elect Trump’s inauguration,” David Reiss, research director of the Center for Urban Business Entrepreneurship at the Brooklyn Law School, said. “Entrepreneurs with consumer credit cards should expect that they could join class actions involving financial products. They should also expect that credit card companies will be more careful in setting the terms of their agreements, given this regulatory change.”

Reiss added that the final adoption or rejection of these rules is also subject to the Congressional Review Act, which empowers Congress to invalidate new federal regulations. Even if the rules were adopted, Congress could ultimately reject them.

“Republicans have been very critical of the proposed rule, which they see as anti-business,” Reiss said.

Historic Preservation and Affordable Housing

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photo by Ebyabe

Lior Strahilevitz has posted Historic Preservation and Its Even Less Authentic Alternative to SSRN. The abstract reads,

Historic preservation regulations are costly, contentious, and – as best we can tell – tend to promote residential segregation. Preservation as practiced in the United States also tells historical tales in a way that is inevitably selective, often more attuned to contemporary needs than historical objectivity, and likely to signal current residents and visitors about whose stories aren’t worth commemorating. Yet historical preservation, even to its critics, can further desirable goals. This essay examines traditional historic preservation strategies while also considering two potential alternatives, neither of which has received much attention.

The first alternative to traditional historic preservation – fake history – is employed on a large scale in the fastest growing residential community in the United States. The essay provides a case study of the use of fake history and theming in The Villages, Florida, revealing both the strategy’s potential for generating low-cost cultural resonance and its pitfalls. The possible connections between The Villages’ omnipresent theming and its disturbingly homogenous demographics are explored. The essay suggests that The Villages’ alternative to historic preservation might be replicated elsewhere and speculates about the demographic results of efforts to create more inclusive fake historical narratives.

A second, and novel, alternative to traditional historic preservation would select sites for historic preservation restrictions at random within a given community. Many of the problems associated with the way historic preservation regulations are implemented in the United States stem from the arbitrary and occasionally ugly battles over what to preserve and what to erase. Historic preservation becomes a battlefield for cultural warfare. Compared with this alternative, the case for randomly preserving in each city a few blocks that date from each particular era, while letting market forces dictate what gets preserved or destroyed elsewhere, may be surprisingly strong.

While I do not like either of these novel alternatives, we would certainly benefit from fresh thinking about what we are trying to achieve with historic preservation. Historic preservation remains too much of a niche area of regulation dominated by the few who feel most strongly about it. It has slowly but surely increased its reach in cities like New York. But it has not been accompanied by much serious thinking by broader constituencies about the costs and benefits of each incremental step.

There are obvious trade-offs with landmarking that don’t just affect landowners and developers. By restricting new construction, landmarking tends to restrict the supply of new housing units. This might be okay, but we should certainly think through those costs before just letting preservation districts cover more and more of a city. I am not particularly interested in communities based on fake history, but others are welcome to them. For me though, I am concerned that our most important cities might end up like Paris — stunning historic playgrounds for the wealthy, encircled by high-rise ghettos for the poor.

The Republican Housing Platform

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photo by DonkeyHotey

The Republican Party adopted its platform earlier this week.  The short housing platform is worth reading in its entirety:

Responsible Homeownership and Rental Opportunities

Homeownership expands personal liberty, builds communities, and helps Americans create wealth. “The American Dream” is not a stale slogan. It is the lived reality that expresses the aspirations of all our people. It means a decent place to live, a safe place to raise kids, a welcoming place to retire. It bespeaks the quiet pride of those who work hard to shelter their family and, in the process, create caring neighborhoods.

The Great Recession devastated the housing market. U.S. taxpayers paid billions to rescue Freddie Mac and Fannie Mae, the latter managed and controlled by senior officials from the Carter and Clinton Administrations, and to cover the losses of the poorly-managed Federal Housing Administration. Millions lost their homes, millions more lost value in their homes.

More than six million households had to move from homeownership to renting. Rental costs escalated so that today nearly 12 million families spend more than 50 percent of their incomes just on rent. The national homeownership rate has sharply fallen and the rate for minority households and young adults has plummeted. So many remain unemployed or underemployed, and for the lucky ones with jobs, rising rents make it harder to save for a mortgage.

There is a growing sense that our national standard of living will never be as high as it was in the past. We understand that pessimism but do not share it, for we believe that sound public policies can restore growth to our economy, vigor to the housing market, and hope to those who are now on the margins of prosperity.

Our goal is to advance responsible homeownership while guarding against the abuses that led to the housing collapse. We must scale back the federal role in the housing market, promote responsibility on the part of borrowers and lenders, and avoid future taxpayer bailouts. Reforms should provide clear and prudent underwriting standards and guidelines on predatory lending and acceptable lending practices. Compliance with regulatory standards should constitute a legal safe harbor to guard against opportunistic litigation by trial lawyers.

We call for a comprehensive review of federal regulations, especially those dealing with the environment, that make it harder and more costly for Americans to rent, buy, or sell homes.

For nine years, Fannie Mae and Freddie Mac have been in conservatorship and the current Administration and Democrats have prevented any effort to reform them. Their corrupt business model lets shareholders and executives reap huge profits while the taxpayers cover all loses. The utility of both agencies should be reconsidered as a Republican administration clears away the jumble of subsidies and controls that complicate and distort home-buying.

The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials. We will end the government mandates that required Fannie Mae, Freddie Mac, and federally-insured banks to satisfy lending quotas to specific groups. Discrimination should have no place in the mortgage industry.

Zoning decisions have always been, and must remain, under local control. The current Administration is trying to seize control of the zoning process through its Affirmatively Furthering Fair Housing regulation. It threatens to undermine zoning laws in order to socially engineer every community in the country. While the federal government has a legitimate role in enforcing non-discrimination laws, this regulation has nothing to do with proven or alleged discrimination and everything to do with hostility to the self-government of citizens. (4)

Here are some of the policy proposals that I think it gets right: abolishing Fannie and Freddie in their current form as hybrid public/private corporations; implementing regulation that promotes responsible underwriting and protects against predatory lending; and banning discrimination in the credit markets.

There is a lot of coded language in the platform, however. And that coded language may be inconsistent with some of those goals. For instance, the opposition to the Obama Administration’s attempts to reduce de facto segregation in the housing markets through such initiatives as the Affirmatively Furthering Fair Housing regulation undercuts the claim that the party opposes discrimination in the housing market.

It will be a long, strange trip to the November election. The direction of federal housing policy must be counted as one of important issues at stake.

Does Housing Finance Reform Still Matter?

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Ed DeMarco and Michael Bright

Ed DeMarco and Michael Bright

The Milken Institute’s Michael Bright and Ed DeMarco have posted a white paper, Why Housing Reform Still Matters. Bright was the principal author of the Corker-Warner Fannie/Freddie reform bill and DeMarco is the former Acting Director of the Federal Housing Finance Agency. In short, they know housing finance. They write,

The 2008 financial crisis left a lot of challenges in its wake. The events of that year led to years of stagnant growth, a painful process of global deleveraging, and the emergence of new banking regulatory regimes across the globe.

But at the epicenter of the crisis was the American housing market. And while America’s housing finance system was fundamental to the financial crisis and the Great Recession, reform efforts have not altered America’s mortgage market structure or housing access paradigms in a material way.

This work must get done. Eventually, legislators will have to resolve their differences to chart a modernized course for housing in our country. Reflecting upon the progress made and the failures endured in this effort since 2008, we have set ourselves to the task of outlining a framework meant to advance the public debate and help lawmakers create an achievable plan. Through a series of upcoming papers, our goal will be to not just foster debate but to push that debate toward resolution.

Before setting forth solutions, however, it is important to frame the issues and state why we should do this in the first place. In light of the growing chorus urging surrender and going back to the failed model of the past, our objective in this paper is to remind policymakers why housing finance reform is needed and help distinguish aspects of the current system that are worth preserving from those that should be scrapped. (1)

I agree with a lot of what they have to say.  First, we should not go back to “the failed model of the past,” and it amazes me that that idea has any traction at all. I guess political memories are as short as people say they are.

Second, “until Congress acts, the FHFA is stuck in its role of regulator and conservator.” (3) They argue that it is wrong to allow one individual, the FHFA Director, to dramatically reform the housing finance system on his own. This is true, even if he is doing a pretty good job, as current Director Watt is.

Third, I agree that any reform plan must ensure that the mortgage-backed securities market remain liquid; credit remains available in all submarkets markets; competition is beneficial in the secondary mortgage market.

Finally, I agree with many of the goals of their reform agenda: reducing the likelihood of taxpayer bailouts of private actors; finding a consensus on access to credit; increasing the role of private capital in the mortgage market; increasing transparency in order to decrease rent-seeking behavior by market actors; and aligning incentives throughout the mortgage markets.

So where is my criticism? I think it is just that the paper is at such a high level of generality that it is hard to find much to disagree about.  Who wouldn’t want a consensus on housing affordability and access to credit? But isn’t it more likely that Democrats and Republicans will be very far apart on this issue no matter how long they discuss it?

The authors promise that a detailed proposal is forthcoming, so my criticism may soon be moot. But I fear that Congress is no closer to finding common ground on housing finance reform than they have been for the better part of the last decade. The authors’ optimism that consensus can be reached is not yet warranted, I think. Housing reform may not matter because the FHFA may just implement a new regime before Congress gets it act together.

The Fed’s Effect on Mortgage Rates

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Federal Open Market Committee Meeting

Federal Open Market Committee Meeting

DepositAccounts.com quoted me in Types of Institutions in the U.S. Banking System – Investment Banks and Central Banks. It reads, in part,

Central Banks

Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve. While there are other important central banks, like the European Central Bank, the Bank of England and the People’s Bank of China. For now, focus stateside.

Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve.

The Federal Reserve was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. To keep it simple, think of the Fed as having responsibility in these four areas:

  1. conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices;
  2. supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;
  3. maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  4. providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.

You need look no further than the Federal Reserve FAQs to learn more about how it is structured.

The Federal Reserve may not take your money, but be clear it has much financial impact on your life. Brooklyn Law Professor David Reiss gives one example, “The Federal Reserve can have an impact on the interest rate you pay on your mortgage. Since the financial crisis, the Fed has fostered accommodative financial conditions which kept interest rates low. It has done this a number of ways, including through its monetary policy actions. The Federal Reserve’s Open Market Committee sets targets for the federal funds rate. The federal funds rate, in turn, influences interest rates for purchases, refinances and home equity loans.”