July 20, 2010
Dodd-Frank Forum: the rulemaking arms race, the fate of the Consumer Financial Protection Agency, and a role for law professors?
Posted by Erik Gerding

The financial reform fight isn’t even half over. We’ve left the headline news period and now move to the rulemaking end of the sausage factory, and there is a lot of sausage to be made. Expect some offal results.

What else do you expect when the issues are highly technical and there is a highly uneven playing field. It doesn’t take a public choice expert to point out that an interest group facing higher stakes, with smaller numbers of participants and more homogenous interests, and possessing greater resources has an advantage. If a particular regulatory issue pits two segments of the financial industry against one another, perhaps there will be some payoff from interest group pluralism. When an issue pits the financial industry against a large group like consumers, who would you bet on? There are many ways consumers can lose – and not just with weak consumer protection laws. Often, regulatory capture results in more rules not less, however, the objective of the rules is not to help the public but to create barriers to market entry.

So the real problem with an independent Consumer Financial Protection Agency is one of basic political economy: who is its constituency? In the short run, it may have really stellar leadership. However, in the long run, pitting consumers against lenders may seal the fate of the agency. I don’t think it is going too far on a limb to predict that this agency will be hamstrung by this imbalance for all of its history.

A similar imbalance will afflict much of the rule making in the wake of Dodd-Frank. Who will make most of the influential comments on these rules? Law firms and trade groups paid for by financial institutions who are – surpise – self-interested. We can tut-tut about this, but that’s part of our regulatory landscape.

I wonder though if there is a way to get law professors more involved in the regulatory process to act as a counterbalance. Many professors contribute to amicus briefs and testify before Congress, but commenting on regulations seems rarer. Commenting on regulations may not be recognized as scholarship or service, and it requires a lot of time and expertise.

Are there ways to institutionalize a role for law professors in commenting on financial regulations? Would it make sense to create a “college” of experts on financial regulation who can comment on proposed rules without being paid by industry? Would something like ALI work? The ABA has a number of financial reform committees, but they are often made up largely of lawyers whose clients have big stakes in the regulatory outcomes. Should we carve out a role for comments from regulators from other countries?

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