The Supreme Court ruled last week that Congress, in establishing the Consumer Financial Protection Bureau, had full authority to grant the Federal Reserve control over its financial resources.
This, however, does not imply it was a prudent decision. Republicans in Congress should propose legislation to eliminate the CFPB’s unusual and unaccountable funding method. Democrats, who currently position themselves as champions of democracy, should support this initiative.
The CFPB was conceived by Sen. Elizabeth Warren (D-MA) as part of Congress’s response to the 2008 financial crisis. For a century, Congress has created various financial regulators but has often been thwarted by what is known as regulatory capture.
The entities most engaged with any regulatory agency are the regulated companies themselves. Consequently, these companies invest in lobbyists and lawyers — often recruiting them from former regulators. Eventually, the regulator and the regulated become collaborators. This collaboration is detrimental to consumers, taxpayers, and potential competitors who are excluded from the market by regulations crafted by the industry.
Warren aimed for comprehensive regulation without the drawbacks of regulatory capture and wanted to eliminate political influence. However, the challenge is that regulators, being part of the executive branch, receive directives from Congress, which is inherently political.
Warren’s solution was to have the CFPB funded by the Federal Reserve to remove “political influence” from the agency.
In practice, this effort to protect the CFPB from political or industry influence has not succeeded. Before President Obama left office, numerous senior CFPB regulators had transitioned to industry roles. Craig Holman of the left-leaning good-government group Public Citizen expressed concern, noting, “As it becomes evident that service on the CFPB can also lead to riches in the private sector, the agency will become increasingly plagued with the conflict of interest concerns that trouble the SEC and other regulatory bodies.”
“I would get calls from headhunters frequently, even right after I started working there,” one regulator mentioned before making the move to the private sector.
But there’s a more significant issue with the CFPB’s structure — one highlighted by the plaintiffs in their ultimately unsuccessful case: Government agencies shouldn’t be shielded from politics because they should be answerable to democracy.
Warren’s goal was explicitly to insulate the CFPB from democratic processes. She envisioned principled and altruistic regulators who would make the right decisions if freed from the pressures of elected representatives.
The CFPB should receive funding through congressional appropriations to ensure democratic oversight over the agency. This aligns with the core principle of government by the people.
If Warren aims to curb regulatory capture, she should heed the advice of late conservative magazine publisher Timothy Wheeler: The only way to eliminate corruption in high places is to eliminate the high places.
