Proponents of financial regulation often point to the unpopularity of Wall Street when pushing for ever greater rules and restrictions. But what happens when the very regulators they seek to arm with more and more power are as unpopular as the Wall Street bankers they rail against?
In a new poll out this week from the Cato Institute, director of polling Emily Ekins finds that Americans distrust government financial regulators as much as they distrust Wall Street. That is a damming indictment given that the legislative response the financial crisis, the Dodd-Frank Act, trusted regulators with extensive powers to manage the safety and soundness of the financial system. Below are a few examples from Ekins’ report, which can be found in its entirety here.
The Dodd-Frank Act was meant to resolve the dual problems of excessive risk taking and “too-big-to fail,” in order to prevent the kind of financial crisis that was unleashed in 2008. Yet Americans are overwhelmingly skeptical of the government’s ability to ensure this. Nearly three-quarters of Americans don’t believe that the new regulations imposed since the crisis will make future crises less likely. They have fair reason to be skeptical, as well. Rather than ending too-big-to-fail, Dodd-Frank has enshrined it, with the largest 5 banks continuing to make up nearly half of the entire industry’s assets. Their risk-taking, on the other hand, hasn’t improved much either. Ever more regulations and supervisory provisions have not convinced the average citizen that the financial system is any more secure.
Dodd-Frank also required regulators to impose hundreds of new rules that often run to thousands of pages. The reality, however, is that Americans don’t want more regulations, they just want the right kinds of them. Ekins’ found that only 18% of Americans believe that there are “too few” rules imposed upon Wall Street. Instead, 63% said the government either fails to “properly enforce existing rules” or enacts the “wrong kinds” of regulations on big banks.
A great place to start would be ensuring that the focus of safety and soundness regulation is not on trying to control the kind of risks that a bank can take, but to make banks more responsible for their own risks. Currently, the regulatory paradigm allows banks to privately reap profits while socializing the losses. For example, Dodd-Frank increased the limit on federal deposit insurance up to $250,000, covering almost 80 percent of deposits. But by guaranteeing customers deposits if an institution were to fail, customers lose the incentive to monitor a bank, and banks are encouraged to prioritize high returns over safety and soundness. Removing these government protections would ensure that banks, not taxpayers, are responsible for their own risk-taking. Americans would prefer these common sense reforms.
Government regulators are not superhuman, and they bring their own fallibilities to their jobs. Ekins confirms that most Americans agree with this, with around 75% believing that “regulators are ineffective, selfish, and biased.” At CEI, we have been arguing a similar point. These regulators utterly failed to mitigate the financial crisis, yet the Dodd-Frank Act has doubled down on this botched approach in the hope that the same regulators will prevent the next one.
Consumer Financial Protection Bureau (CFPB)
A major political fight today surrounds the role of government regulation in consumer financial protection. At the helm is the highly controversial CFPB, the brain child of Sen. Elizabeth Warren (D-MA), who advocates rooting out financial products that may be harmful to consumers.
Yet this is at odds with what the majority of Americans want from consumer protection. Ekins found that restricting access to risky financial products is a priority for only 13% of respondents. On the other hand, most said that governments should allow individuals to make their own financial decisions, even if they make the wrong ones.
The CFPB, however, has taken just the opposite approach. Through regulations covering payday loans, prepaid debit cards, and even contractual agreements on lawsuits, the agency has taken it upon itself to make American’s financial decisions for them. This does not bode well for consumers. As a result of many of their rulemakings, millions of Americans have found it more difficult to get a mortgage or access credit to start a business. The CFPB has ignored the kind of consumer protection that American’s are looking for, instead preferring to strip consumers of choice and responsibility.
The new Cato Institute poll is an invaluable look into the perspectives of everyday Americans on financial regulation. This is particularly important in Washington, as regulators tend to assume that they know best, always acting in the average citizen’s best interest. Yet thousands of new rules have not convinced Americans that the financial system is any safer. Perhaps a better way to promote an efficient and stable financial system is to foster an environment of financial competition, where institutions compete on the merits of their products and bear their own risks, instead of relying on the government for protection.