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A few weeks after Dodd’s rollout, former Clinton White House Council of Economic Advisers chairman and current Brookings Institution senior fellow Martin Baily wrote that anything other than a stand-alone agency would upset liberals, but Dodd’s version “looks like a clever ruse to use the Fed’s deep pockets as an independent source of funding for the bureau.” With the budget showdowns that became a fact of life after Republicans took control of the House the next year, insulating the CFPB from the regular appropriations process proved to be a prescient way to keep it off the chopping block.
For Corker and Shelby, the Fed appeared to be a way of keeping the CFPB from running amok as they thought it would under Obama’s proposal. As the New York Times reported, “Republicans and Wall Street wanted, instead, for consumer protection to be woven into regulation of financial firms’ soundness. Corker eventually offered to create an independent consumer agency within the Federal Reserve — but limit its ability to enforce its rules.”
The thinking that an association with the central bank would depoliticize consumer regulation was misguided. The Fed, like the National Labor Relations Board and other “independent” institutions, has increasingly submitted to the president’s agenda. Chairman Ben Bernanke’s bond-buying has enabled the Obama administration to fund trillions in deficit spending at suppressed interest rates. Republicans are naïve if they still see the Fed as a buffer to the administration’s fiscal irresponsibility the way they did when Alan Greenspan was in charge during the Clinton administration.
Senate Republicans, including Corker and Shelby, did not end up supporting Dodd-Frank, but they did grease the skids for its worst feature — an unrestrained financial regulator funded with the Fed’s unlimited checkbook.
Better understanding of the Federal Reserve System’s political exposure could have prevented this mistake. Beyond bringing the CFPB back under Congress’s appropriations power or even repealing Dodd-Frank, the GOP should focus on scaling back the Fed, not lengthening its tentacles.
Rich Danker is economics director at American Principles Project.