The CFPB Has Adequate Checks

July 16, 2013Danny Vinik Leave a comment

As a fan of the Consumer Financial Protection Bureau (CFPB), I am very happy that Richard Cordray will almost certainly be confirmed as its legitmate head later this evening. It took Majority Leader Harry Reid (D-NV) almost deploying the nuclear option in the Senate, but it appears that Cordray’s nomination will overcome a filibuster and that he will be confirmed as the agency’s first director.

So, why did it take so long for his confirmation? Not because he isn’t qualified. Republicans have no qualms about his qualifications. What Republicans have objected to is the agency itself. A letter to President Obama on February 1st this year signed by 43 Republicans outlined their concerns. They are as follows:

Establish a bipartisan board of directors to oversee the Consumer Financial Protection Bureau
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Subject the Bureau to the annual appropriations process, similar to other federal regulators
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Establish a safety-and-soundness check for the prudential regulators

After today’s vote to proceed to his nomination, Senator Chuck Grassley (R-IA) complained that “we don’t have adequate checks within the bureaucracy.”

Well, the last few days demonstrate why Dodd-Frank created a single director for the agency and not a board. Just look at the National Labor Relations Board (NLRB). The Board currently has just three members and on August 27, when Mark Pearce’s term expires, it will be unable to hold a quorum and thus will have no power. Without Reid’s willingness to invoke the nuclear option, the GOP would have continued filibustering all NLRB nominees, effectively rendering the agency useless. Is that what Democrats want to see happen to the CFPB? Of course not!

Having a board of directors instead of a single director has its own advantages. More voices at the top of the agency can prevent it from acting outside its purview or not enforcing strict enough regulations. But it also slows the agency down with more people at the top. It would also require multiple confirmations to function. The GOP could confirm a couple of nominations and just filibuster the rest to prevent the agency from operating. As of today, that should be a thing of the past with the agreement between the two parties never to filibuster executive nominations again. But up until today, Democrats did not just fear that the GOP would obstruct the agency this way; they knew it would. Republicans can appeal to change it now that there is an agreement on filibusters, but they still must demonstrate why a board is better than a single director for the CFPB.

The CFPB also has to report on its actions and appear before Congress. It is subject to an annual audit by the Government Accountability Organization (GAO). It’s also monitored by the Inspector General for the Federal Reserve Board of Governors. Republicans want a dedicated Inspector General for the agency. Fine by me. I’m not sure why Democrats blocked the amendment earlier this year, possibly out of anger over Republication obstructionism over Cordray. Now that he’s confirmed, Democrats should relent and allow the agency to have its own IG.

How about subjecting the budget to the annual appropriations process? This one is easy: Hell No! Republicans’ favorite way to prevent agencies from using their full powers is to reduce or eliminate their funding. House Republicans have repeatedly voted to slash the Commodity Futures Trading Commission’s (CFTC) budget even as the agency has taken on a greater regulatory role after the passage of Dodd-Frank. The Securities and Exchange Commission (SEC) has seen its budget cut as well. Neither agency has near enough money to compete with the seemingly endless cash from Wall Street. Why would Democrats allow the same thing to happen to the CFPB? The agency receives a maximum of 12% of the Federal Reserve budget. It’s not unlimited and if it wants more funding, then it must ask Congress for it.

As for the safety-and-soundness check, Mike Konczal explains it better than me:

There is already a safety-and-soundness check at the OCC, which, through the Financial Stability Oversight Council, can vote on vetoing CFPB actions. It’s not clear why this is important to Republicans. A cynical reading would be that since profit-making is one way to achieve the safety and soundness of banks that the CFPB regulates, anything that might get in the way of banks ripping off their customers would hurt safety and soundness. And, indeed, big fines and settlements for illegal practices do, in theory, mean more capital that they’ll have to raise, or lower earnings for shareholders. But aren’t such fines and settlements how we provide accountability to the financial sector?

The FSOC can veto any CFPB action if it endangers the “safety and soundness of the United States banking system or the stability of the financial system of the United States.” That’s a pretty good safety-and-soundness check. If Republicans really want to interpret such a check so that any rule cannot reduce the profits of banks, that’s ludicrous. Otherwise, I’m not sure what they want. The Bureau must already “consult with prudential and other federal regulators during rulemaking regarding prudential, market and systemic objectives.”

So, it’s a happy day for CFPB-lovers out there. The agency will finally have a legitimate head without giving into Republican demands. Democrats should agree to install a dedicated IG for the Bureau and let the agency function as it was designed from here on out. It’s about time it had its full powers.

Legislators Are Like Kids

July 15, 2013Danny Vinik Leave a comment

The Senate Finance Committee is determined to take on tax reform, but Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) have chosen a unique way of starting the process: they are asking their colleagues what tax breaks they want, not which ones they want to eliminate. Basically, they are starting from a blank slate and asking lawmakers what they want. The goal was to give Senators the chance to fight for their beloved tax breaks, since few would fight for the removal of favorable tax breaks.

Genu Steuerle of the Tax Policy Center summarized the benefits of the strategy a few weeks ago:

[I]dentifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.

But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.

…

But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline.

So, have other Senators stepped forward to support their favorite tax breaks? Not exactly. Senators don’t really understand the process and are worried that supporting one tax break over another will anger certain interests. So far, submissions have been few and far between. Baucus is still convinced that the process will work and a few Senators are working on legislation supporting different tax breaks, but most are hesitant to join on this method of reform.

This reminded me of a passage from Michael Grunwald’s book on the stimulus where he explained the White House’s strategy of not force feeding legislation down Congress’s mouth. Instead, it tried to give them some autonomy over it in hopes of generating greater support and speedier passage. What the Administration found was that Congressmen were eager for guidance:

The cagey approach helped fuel the myth that Obama punted the Recovery Act to Congress. He never submitted a formal draft, and many Hill Democrats grew frustrated with his team’s refusal to nail down exactly what he wanted and what he needed in the bill.

…

As one Senate staffer puts it, most legislators are like kids: They say they want freedom, but deep down they crave guidance. So Democrats who had spent years demanding respect from the White House quickly decided that Obama’s team was too deferential. “People were like: Just tell us what the hell you want!” recalls Tom Perriello, a Virginia Democrat who had just been elected to the House.

Baucus and Hatch’s reform process differs from the Stimulus because the Stimulus didn’t create losers, as tax reform undoubtedly will. But, still, the two legislators should keep this in mind as they continue down this road. Legislators like a coherent direction about not just how the process works, but also what the limits are of their power throughout it. Right now, no one knows how many tax breaks they can or should fight for. They don’t know the likelihood of passage or how their support for different tax breaks will affect them politically. Everything is up in the air and many Senators are too scared to take part.

So Baucus and Hatch should be forewarned: starting from a blank slate sounds like a great idea, but like children suddenly confused by having free reign over their day, Senators are equally bewildered by having free reign over legislation.

When You’re in Office, Govern

July 11, 2013Danny Vinik Leave a comment

Chris Cilliza wrote a post yesterday warning Democrats to be careful about changing the filibuster rules as Senate Majority Leader Harry Reid is considering for nominations to cabinet and agency positions. He says that if Democrats change the rules now just for those positions, expect Republicans to take it a step further if they take control of the chamber in 2014:

But, politics works on the slippery slope principle. That means that if Democrats cross the line to change a rule to benefit them when they are in the majority, it sets a precedent for rule-changing that is not limited to filibusters on agency and cabinet nominees in future Senates — including those controlled by Republicans.

This may entirely be true, but I still think Harry Reid should go nuclear. Why? Because if the GOP takes control of the upper chamber in the midterm elections, they may change the rules anyway. Republicans have been clamoring for years about the oppressive regime of Barack Obama. If they keep the House and take the Senate next year, but Senate Democrats begin filibustering every piece of legislation, do you think they are just going to accept defeat as Democrats have? I’m very skeptical of that. The Tea Party base will rally in a hurry and demand that Republicans fix the filibuster. After all, Democratic obstruction in the Senate would just become an extension of the authoritarian stranglehold Obama has on the legislative process. Whether or not Reid decides to change the rules now, he should at least work under the expectation that Republicans are going to strongly consider changing the rules in the future anyways.

But there’s also a more simple reason to change the rules: when you’re in office, govern. I think it was Michael Grunwald who tweeted this a ways back (I can’t find it now), but it’s stuck with me. It’s why I think Democrats should (and have) compromised on immigration reform. When you have the presidency, use it. When you have the Senate, use it. President Obama has inexplicably been historically slow at nominating judges. That fault lies entirely on him (and Senator Leahy). The confirmation process has been just as slow. But there are other positions (NLRB spots, CFPB head Richard Cordray) that Republicans have filibustered simply because they don’t like the agencies. Sorry, that’s not how government works. If you don’t like an agency, pass legislation to amend it or abolish it. Don’t filibuster the heads of those departments to prevent them from operating. That’s just as illegal as President Obama’s regulatory end-around on the employer mandate.

The President took a chance in “recess” appointing his NLRB nominations and Cordray, but one court has already ruled that Obama overstepped his authority with the NLRB appointments and others will follow. That puts all of the agencies’ current actions in jeopardy. It’s long past time the GOP gave them an up or down vote. If the President cannot fill simple vacancies like these, then government cannot function. Republicans will just refuse to confirm the leaders of any agency they dislike. That’s not how government works and the Reid must finally stand up and say, “Enough is enough. Give us a vote or get out of our way. You can do what you when you’re in power and see what happens, but right now we have control.”

The NLRB and CFPB deserve to operate with the full-extent of their powers.

President Obama and Harry Reid should listen to Grunwald: When you’re in office, govern.