Bankruptcy

The Political Economy of CFPB Funding

By Adam Levitin

Federal Reserve Bank of St. Louis President James Bullard is kvetching about the CFPB's funding mechanism.  It seems that he doesn't like the CFPB having a claim on 12% of the Fed's budget.  That money might get used for effective consumer financial protection or something crazy like that, instead of for bailing out parts of the financial system.  

Bullard argues that ?The amount of money allocated in the law is not based on any careful assessment of what the needs of the bureau will be as it attempts to fulfill the mandate of the Congress with regard to consumer protection."  

At least from his quoted comments, it seems that Mr. Bullard simply doesn't understand the rationale behind the CFPB funding mechanism.  

CFPB funding isn't a poorly thought-through piece of legislation; a lot of thought went into this particular issue.  The concern that Congress and CFPB advocates had was that if CFPB were subject to the regular appropriations process, it would be too easy for CFPB to be strangled in the appropriations process, which is one of the least transparent parts of Congressional activity, and therefore the ideal place to ice an agency.  The whole point of giving the CFPB a percentage of the Fed's overall budget was to ensure that the CFPB will always have the financial wherewithall to be effective--consumer financial protection shouldn't be a politically dependent matter.  Congress acted deliberately and intentionally to bind its own hands in the future when political winds change.  Mr. Bullard might not like that, but it's just wrong to say that this wasn't based on a careful assessment of the CFPB's needs.  The CFPB funding mechanism is based on a careful assessment of the CFPB's needs and the political economy of consumer protection.  

A few other points:

(1) CFPB is not mandated to spend all that money.  If CFPB doesn't spend its entire budget, that money goes back to Treasury.  Therefore, it's really not a big deal if CFPB is overbudgeted. 

(2) Recall that a major reason we needed a CFPB was that consumer financial protection was severely compromised by housing it in bank regulators who got their funding from banks, not through the appropriations process.  

(3) As far as I understand (and I make no pretense of expertise here), the size of the Fed's budget is kind of beside the point--the Fed isn't under appropriations control and if it needs money, it can print it.  Anything left over at the end of the year goes back to Treasury. 

(4) Yes, CFPB is housed in the Fed but completely independent from it.  That's the point--separate bank regulation from consumer protection.

Full post as published by Credit Slips on November 29, 2010 (boomark / email).