CHAMPAIGN, Ill. – What’s the bottom line for consumers if Congress approves a mammoth, 2,300-page bill hailed as the most sweeping reform of the nation’s financial system since the Great Depression?
“I think consumers should pump one fist for joy and shake the other in anger,” said University of Illinois law professor Robert Lawless, a consumer credit and bankruptcy expert.
He says the proposed overhaul offers a host of new safeguards for consumers, but could have gone further to ward off a repeat of the 2008 meltdown that shot unemployment to double digits and carved deeply into personal wealth and savings.
“It also could have been much worse, such as having no reforms at all,” Lawless said. “If the people who got us into our current mess had their way, they would have been happy with nothing at all. So while the reforms may not be ideal, we certainly would be better off than we were before.”
The massive bill, which was approved by the House and could go to the Senate next week, includes dozens of provisions that would touch consumers directly, from free credit scores to standardized and simplified contracts for mortgages and credit cards.
But Lawless says one of the key consumer-protection proposals targets Wall Street, establishing regulations to make derivatives trading more transparent and reduce the risk of another collapse rivaling the housing bubble that sparked the latest economic crisis. (M
“The average person is going to look at the derivatives legislation and say this doesn’t affect me,” he said. “But the reason we’re in the mess we are today is largely because of derivatives trading and the collapse of the liquidity bubble it created.”
Lawless says new regulations on derivatives trading would reduce the risk of another epic meltdown, not prevent one.
“One of the lessons of history is that big economic swings come and go,” he said. “Even the best regulations will never prevent them. But hopefully the new regulations would make it longer between downturns and they wouldn’t be as bad and deep as we’re experiencing now.”
The proposed trading rules would require big banks, hedge funds and other groups to go through transparent clearinghouses designed to ferret out problems before crisis erupts. But Lawless says political compromises watered down the legislation, granting exemptions for many commercial end users of derivatives, such as airlines and manufacturers.
“There are whole armies of lawyers and financial advisers working right now to engineer financial products that fit within those exemptions,” said Lawless, a regular contributor to Credit Slips, a blog that focuses on credit and bankruptcy issues.
He says the bill’s other key plank for consumers is a proposed Bureau of Consumer Protection, an independent regulator housed within the Federal Reserve that would consolidate oversight of a wide variety of financial products, including mortgages, credit cards and payday loans.
The bureau would give consumers a designated watchdog to protect their interests, leading to easier-to-understand contracts for mortgages and credit cards, clearer billing statements and other consumer-friendly moves to prevent lenders from taking unfair advantage of borrowers.
Lawless says the bureau also could respond more quickly than Congress if the financial industry develops new products or strategies that shortchange consumers, reacting in weeks or months rather than years.
“The bureau is a great idea, in theory,” he said. “The question is whether the practice will live up to the theory.”
The potential problem, Lawless says, is that the bureau would be subject to the same political influences as other government agencies and its focus could shift based on the whims of new presidential administrations or the clout of industry lobbyists.
“The lesson from history is that federal agencies have to fight to keep their autonomy in the long run,” he said. “The bureau could have a good short run, while the crisis is still fresh in everyone’s minds, but in the long run it undoubtedly will face strong pressures to go easy on the industries it regulates.”
