Elizabeth Warren will address the Democratic National Convention Wednesday during the 10pm hour right before Bill Clinton. The Harvard professor and former head of the Chair for the Congressional Oversight Panel dealing with the Troubled Asset Relief Program is running for Senate in Massachusetts. Her opponent is Republican Scott Brown, who in a 2010 special election, ascended to the seat formerly held by the late Ted Kennedy by upsetting Attorney General Martha Coakley.
One of Warren’s signature issues is regulation of the financial sector, which cratered the global economy in 2007 and 2008 thanks to an orgy of easy credit, and wanton speculation in a poorly regulated and murky derivatives market. In her capacity as chair of the oversight panel, and as a candidate, Warren has been one of Wall Street’s toughest critics. The new Consumer Financial Protection Bureau, which was established to protect Americans from misleading, unfair, and abusive practices by banks, mortgage lenders, credit card companies, payday loan services, and other institutions, is her brainchild.
Even before the financial crisis fully materialized, Warren saw the importance of such an agency. In a 2007 essay for the journal Democracy, she outlined the case for a consumer protection agency for financial products. She began that piece by posing a simple but important question: “Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?” Indeed, even borrowers who make payments on time and abide by all the rules can suddenly find themselves susceptible to hidden clauses that were buried under financial jargon in the contracts they signed.
The CFPB’s mission is to curb these practices by holding lenders to a minimum standard of transparency and fairness in their dealings with customers. Not surprisingly, banks and other financial institutions lobbied furiously against the creation of the CFPB as part of the Dodd-Frank financial reform act that President Obama signed into law in 2011. Banks are in favor of transparency, so long as it’s a one-way street. When a person or business applies for a loan, rest assured, the lender will conduct a full biopsy of that person’s financial records and employment status.
But when it comes to the products they sell, as far as they’re concerned, the more obscure the better. Banks and other sellers (of anything), do not want to deal with the informed, rational individuals that Adam Smith alluded to in Wealth of Nations, but rather confused consumers who will sign on the dotted line and ask questions later. What made Wall Street's behavior in the lead up to the financial crisis so deplorable is that in many instances financial institutions deliberately mislead customers or omitted crucial information in its dealings with individuals and even other financial institutions.
While it remains to be seen how effective the CFPB will be in combating deceitful and abusive lending practices, it’s clear that Elizabeth Warren was ahead of the curve in demanding greater protections for borrowers.