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Trump’s Fateful Mistake on Consumer Financial Protection

WASHINGTON, DC – The founding myth of US President Donald Trump’s administration is that it will look out for ordinary Americans, and that cutting taxes on companies, deregulating finance, and rolling back environmental protections will achieve that. None of this makes any sense, and the administration’s claims that these measures will spur an economic boom – with annual growth accelerating from 2% to 3% – are pure fantasy.

American voters are beginning to figure this out – as indicated by recent election results in Virginia and elsewhere. But it will take a while for the falsity of Trump’s promises to be exposed, partly because many macroeconomic changes are complex and become apparent (or don’t) over time.

Now, however, Trump has made a major tactical mistake. By seizing control of the Consumer Financial Protection Bureau (CFPB), and placing an ideological extremist in charge, he has brought to the fore the deepest flaws in his administration’s founding myth.

The CFPB was established by the 2010 Dodd-Frank financial-reform legislation to do exactly what its name implies: protect consumers in their various financial transactions. A new agency was needed because existing regulators, including the Board of Governors of the Federal Reserve System, had manifestly and repeatedly failed to protect consumers from abuses, such as deceptive and fraudulent mortgage-lending practices, some of which were at the heart of what went wrong in 2007-08.

As Elizabeth Warren (then a consumer advocate, now a US senator from Massachusetts) powerfully pointed out, there was a lot more protection for people buying toasters than for someone taking out a 25-year mortgage. Finance is complex, and a lot of devils could be, and were, hidden in the details. The CFPB was designed, above all, to bring greater transparency to consumers’ financial transactions – actually a very pro-market contribution.

And the CFPB has done exactly what Congress designed it to do. So far, the Bureau has arranged for the return of almost $12 billion to 29 million consumers. At the same time, banks are reporting record profits – on the order of $171 billion, according to the latest data. The CFPB is good for business, or at least for the straightforward, transparent business of traditional lending.

Unfortunately, some in the financial sector – such as payday lenders (which charge very high interest rates) – have never liked the scrutiny that the CFPB brings. These players, among others, have worked hard to abolish or severely curtail the agency, donating a great deal of money to members of the House Financial Services Committee for the same end. Anyone who appears before the committee on anything CFPB-related can expect to hear scorn and venom from its Republican members, who claim – on the basis of no real evidence whatsoever – that the agency impedes growth, destroys jobs, holds down wages, or something else.

Trump’s predecessor, Barack Obama, appointed – and the Senate confirmed – Richard Cordray as the CFPB’s first director. By all reasonable accounts, Cordray did a terrific job. With his term about to expire in 2018, all Trump needed to do was wait him out.

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Last week, however, Cordray unexpectedly resigned, naming his chief of staff as his successor. Trump responded by appointing Mick Mulvaney, the head of the Office of Management and Budget, to run the CFPB. A federal court has now ruled that Mulvaney may hold the position until the Senate can confirm a new director.

Trump’s first mistake was to call attention and bring drama to an appointment that was going to be his to make in any case. His second mistake was to appoint Mulvaney, an anti-government radical who wants to cut as many federal agencies as he can (and is now presiding more broadly over a tax plan that will greatly boost the budget deficit and national debt).

Naturally, Mulvaney has already announced an immediate freeze on all CFPB rules. Over time, whatever the short-term outcome of any judicial appeals, we should expect key people to be forced out of the agency, procedures to break down, and consumers to receive less redress. The effect of institutional turmoil will be dramatically chilling.

The CFPB is currently one of the most responsive government bureaucracies, focused on a specific set of achievable tasks. This will now end, likely quite soon.

But protecting consumers from financial abuses is not like macroeconomic policymaking or even budget making, which very few people understand. Consumers know if they have been ripped off. And they know if someone helps them get their money back. In a year or two, the newspapers will be full of stories of people – some of them Trump supporters – being exploited by unscrupulous financial operators and then ignored (or worse) by the federal government.

The backlash against Mulvaney-style minimal government – which means no protection whatsoever for ordinary people – begins at the CFPB. A founding myth that so visibly harms those whom it claims to defend will return to the political fringe, where it has belonged all along.

Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.

By Simon Johnson

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