Elizabeth Warren, chair of the Congressional Oversight Panel, argues that the financial industry has profited from government's well-documented refusal to protect consumers. A Consumer Financial Protection Agency can change that -- bringing honesty back into our financial transactions and innovation back into the financial industry.

The Federal Reserve, the OCC [Office of the Comptroller of the Currency], and the OTS [Office of Thrift Supervision] have had the legal authority to protect consumers for decades. The agencies’ well-documented refusal to protect consumers — refusal that ultimately jeopardized safety and soundness of financial institutions and that brought the economy to its knees — results from two structural flaws in the current system.

The first flaw is that financial institutions can choose their own regulators, which causes regulators to under-regulate. By changing from a bank charter to a thrift charter, for example, a financial institution today can change from one regulator to another. In fact, an institution may decide to evade a federal regulator altogether by housing its operations in the states and forgoing a federal charter. Institutions can shop around for the regulator that provides the most lax oversight, and bank holding companies can shift their business from their regulated subsidiaries to those with no regulation — and no single regulator can stop them. The problem is exacerbated by the funding structure: Regulators’ budgets come in large part from the institutions they regulate. This regulatory arbitrage has triggered a race to the bottom among prudential regulators and has blocked real consumer protection.

The second structural flaw is a cultural one: Consumer protection staff at existing agencies is small, the last to be funded, and always playing second fiddle to the primary mission of the agencies. At the Federal Reserve, senior officers and staff focus on monetary policy. At the OCC and OTS, agency heads worry about capital adequacy requirements and safety and soundness. As the current crisis demonstrates, even when they have the legal tools to protect families, existing agencies have shown little interest in effective consumer protection.

President Obama’s proposal to create a new Consumer Financial Protection Agency (CFPA) represents a significant paradigm shift — a shift that will repair a structure that failed us.

First, the CFPA will bring existing federal consumer regulation under one roof. Similar regulations for similar products will apply across the board — whether those financial products are issued by a federally chartered bank, a state chartered thrift, or an unlicensed business. Financial institutions will be unable to shop around for the regulators that regulate least. Likewise, regulators will no longer have to choose between relaxing standards or watching haplessly as institutions choose to go outside the regulatory system altogether.

Consolidation will also allow for streamlined, smarter, and more consistent regulations — regulations that will reduce cost and burden but increase effectiveness. Instead of passing one law after another weeding out credit scams and dividing regulation among many agencies, a single agency can slice through the regulatory maze to create one consistent — and well-enforced — set of rules.

The CFPA would create a home in Washington for people who care about whether families are playing on a level field when they buy financial products. Canada created this structure by establishing its own version of a CFPA in 2001, and its policymakers swear by the results. By bringing economic experts who care about consumer financial issues under one roof, CFPA can develop as a smart agency with real expertise.

A smart agency with real expertise will develop safety standards that work for families and that, in turn, will promote stability among institutions and prevent the next crisis. It will focus on one, driving question: Are consumer financial products explained in a way that consumers can understand and that allows the market to work?

Today, mortgage disclosures are incomprehensible to — and unread by — virtually everyone. The average credit card contract is now 30 pages, up from only one page in 1980. While lenders promote a few highly visible features — nominal interest rates, free gifts, and warm and fuzzy branding — the real revenue enhancers are the tricks and traps buried in the fine print. The CFPA would ensure that contracts are comprehensible and that consumers can compare terms. When consumers are able to make informed choices and comparisons, the industry will begin to innovate around their preferences — not around more tricks and traps.

The CFPA will promote comprehensible disclosure by pre-approving templates for “plain vanilla” contracts designed to be read in just a few minutes — a regulatory safe harbor that would reduce regulatory burden. The lender would fill in the blanks — like the interest rate, when a penalty is triggered, how much the penalty will be, and so on. Risk-based pricing would live on. And institutions could continue to offer complicated or risky products, so long as the risks and costs are disclosed in terms that can be read quickly and that can be clearly understood.

Of course, even with a CFPA, consumers who go on shopping sprees they can’t afford would suffer the consequences. Personal responsibility will be as important as ever. But the CFPA will allow for consistent, across-the-board safety standards that ensure borrowers can understand the costs of their credit and compare products. The health and vibrancy of the consumer credit market — and our economy — depend on that.

Defenders of the status quo have long tried to make financial regulatory reform sound complicated and dangerous. The result has been lax standards and little oversight. Big financial institutions lobbied against the establishment of FDIC insurance in the 1930s, but the resulting security strengthened families, banks and the economy. Once again, real regulatory reform is needed. Dangerous consumer products have destabilized families and injected huge amounts of risk into our economy. Real regulatory reform means more than making tweaks on the margins and perpetuating a status quo that failed us. It means permitting bank examiners to focus on their areas of expertise — safety and soundness — while building an agency that has real expertise on — and that really cares about — consumer protection.

Elizabeth Warren chairs the Congressional Oversight Panel. She is a Harvard Law professor, teaching contract law, bankruptcy and commercial law. In May 2009, she was named one of Time magazine’s 100 Most Influential People in the World. This piece first appeared in the The Hill.

Robert Johnson, director of the Economic Policy Initiative of the Roosevelt Institute, argues that Wall Street can no longer dazzle Americans with fancy "innovations." Instead It must prove those innovations are good for (all of) us.

Well, I sailed through the storm

Strapped to the mast,

But the time has come

And I'm seeing the real you at last.

Bob Dylan- Seeing the Real You at Last

Innovation.  It is a lovely word that teases the mind with the notion of expansive possibilities. Pushes out the frontier.  A win-win game.  Just as Americans once expanded westward to relieve social tensions, we are now exhorted to have a rather imprecise faith in the notion of technological change to deliver us from our current troubles.  Embracing that starship to unlimited possibility and deliverance requires a faith that cannot be easily refuted:  Who, after all, is against progress?

David Noble, who has written so powerfully about this in his series of books including America by Design, Religion of Technology and Beyond the Promised Land, has explored this mythology of redemption and salvation through changes in technique and deference to undefined dreams of "possibility."  It is time to apply his perspective to the religion of financial innovation.

We have seen the financial sector,  with its massive resources and access to the best minds of public relations, work to create what Stuart Ewen calls "spin."  The sector has busied itself with presenting new financial techniques, gilded as glories of 21st century innovation. In the deregulatory era of finance, we have been ever-so-persistently encouraged to draw the comparison between developments in financial products and the great leap forward in social uses of computers and the Internet, or advances in biomedical research. Former mathematicians, physicists, and computer scientists redirected their energies and Ph.D. tenacity to the domain of finance.  Financial innovation was presented to us in a way that suggested that great things were happening for mankind.  The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future.

Skeptical questioning--"Where are the benefits to be found?"--was frowned upon or ignored.  "Just doesn't get it," the whisperers would say.  The skeptic was discredited with the insinuation that he or she was either 1) jealous of those who were making money and progress at the same time, or 2) had fallen down like a tired horse and just could not keep up with the new breed of thoroughbreds on Wall Street.  After all, what kind of human spirit  would get in the way of progress?

The reason I bring forward the notion of "spin" is that I sense that the great benefits of financial innovation were not self-evident, and that some form of intimidation or coercion was needed to keep the genie of doubt in its bottle.  If a great Wall Street luminary were actually forcefully questioned, could he really convince grandma and you and me that he was making the world a better place?  The point of the exercise, the spin, was to create deference to this process, to deter questioning and create social license, to make what those rocket scientists were doing appear as though their work was not merely profitable but something that would benefit us all.   It was presented like a free option to the public: Wall Street pays these guys and "shazam!" They do things that make us all better off.   No reason to get in the way of that, or even suggest that your Congressman or friendly bank regulator keep an eye on the proceedings.  The subtle message was, "Get out of the way."  Such was the Kool-Aid poured into our glass by the financial press and pundits. That capital avoidance and tax avoidance and regulatory evasion were involved in offshore and off- balance-sheet methods was rarely emphasized, as the notion of innovation was paraded like a badge of valor.

Then we had the crisis.  The side effects and spillovers and bailouts reminded us that what we had allowed to unfold was not a free option on progress but something that had a downside, too.  It's funny how a crisis changes your perceptions.  Derivatives are weapons of mass destruction, said Mr. Buffett, who owns large blocks of stock in many of the financial weapons manufacturers.  Paul Volcker claims now that the only worthwhile innovation he can cite is the ATM machine. (And the banks have doubled the fees for using them post bailout!).

Despite these recent protestations, I am witnessing the lingering hangover of deference to so-called "innovation."  It permeates the debate on regulation.  We hear that getting in the way of new technique may cause more problems than it solves.  Or that the innovators can always outrun the regulators.  Or, and this is my favorite, that nothing you do to stifle these new derivative products like credit default swaps will (ominous music in the background) lead to "systemic risk."   Systemic risk is the new stun-gun phrase to impart dread to those who would tamper with this delicate machine.

Malarky.  This is all code for defer to the wishes of those who make money from these techniques.

Financial engineers on Wall Street are employed to make money for Wall Street firms and themselves.  There is no hidden code that says they will design their products to align private and social benefits and costs.   That is precisely where a healthy role for regulation and laws and enforcement can be envisioned.  At the same time, it is important not to be romantic about that vision, though. Regulatory policy often does not live up to the romantic appeal, as theories of collective action and regulatory capture have illuminated.

My takeaway is distinctly unromantic.  It is that, devoid of these religious-like connotations, innovation simply implies the use of a new method or technique. It can be harmful or it can be helpful.  Let's keep score.   It can benefit us both, or it can harm us both, or it can make you better off and me worse off, or vice versa.  That sober reality, and the notion that we are a society, sets the stage for critical thinking about these methods.  If credit default swaps serve a purpose and are economically viable when proper capital and margin requirements are in place, then let the proponents bear the burden of proof in convincing us of the benefits to society according to some real social goals, rather than the vague myth of intangible progress.   Protecting the profit margins of large investment firms is not a social goal.

We have a serious and  real problem right now as a society that employs complex technique.  Experts in the financial, nutrition, energy, and health realms have been found wanting when the curtain is pulled back and their behavior examined.  Trust, particularly in financial expertise,  has been shattered.   Early in the 20th century, the so-called  Progressive Era was an attempt to bridge the gap  between the oligarchs of industry and the populists.  Deference to expertise was said to be in the interest of all.  Delay gratification and let the experts allocate capital so that in the future we would all be better off was the mantra.  It had a religious-like psychic resonance.   Experts on economics and social planning were custodians of our future, not unlike the role that priests played in earlier times.  Restrain yourself now to achieve the promise of the afterlife. The linchpin was the experts vision and integrity.  They were trusted to make sure we all got to economic heaven together.

We just got handed a big bill and the perpetrators that led to the bailouts are back getting large bonuses.   If experts cannot be trusted and governments are unwilling to change the rules, then we will once again be heading toward popular reaction.  The cooperative game is breaking down.  The population showed us a hint of that over the AIG bonuses. A volcano that is still today may yet explode tomorrow.

As I watch the stories of this newest revelation on the wonders of  financial innovation, so-called high frequency trading (HFT), I scratch my head and wonder how we got to this place: That most profound mystical deity which we are asked to worship, "the market," can now be rigged so that a few get to see orders beforehand.  As Charles Duhigg wrote last week in the New York Times, "While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee."

This "innovation"--employing monster computing power and the apparent ability to buy your way to the front of the line--looks like old fashioned front-running to me.  How can that contribute to the integrity of our marketplace?  Bob Kuttner has written an illuminating piece on this subject.  For my part,  I just hope that our society can demystify (unspin?) this process.   It is time to build a financial system that serves the real economy for the next generation.  To do so, we may need to sweep aside some of the so-called innovations in financial practice that were born of this foolish era of market fundamentalism  and its supervisory and enforcement laxity. Surely there are techniques that we should adopt. Yet in the aftermath of the crisis the burden of proof is on those who advocate them. Where are the benefits to society? What are the costs? To answer those questions, we must come out from the well spun power cloud of Wall Street and ask real questions. Regarding financial innovation,  I am fond of  the lyrics of Michael Stipe.  It is time we start losing our religion.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

Roosevelt Institute Braintruster Marshall Auerback wonders why bailed-out banks are getting giddy with dangerous speculation and sky-high bonuses when the rest of us are still dealing with financial chaos. Has the American public had enough?

Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., the three biggest U.S. lenders, collectively reported a total of $10.2 billion in profits for the second quarter that largely relied on investment banking and asset sales to counter growing losses on consumer loans. Goldman Sachs Group Inc., which gets almost none of its revenue from retail consumer banking, reporting earnings of $3.44 billion, its highest quarterly result since becoming a public company.

The Goldman Sachs earnings announcement in particular was basically a big "SCREW YOU" to the American public. True, the results appear to show that we have stepped back from the financial abyss. The stock market is up by a third from its March lows. Of more significance than the earnings was Goldman's announcement that it will be awarding individual bonuses in the tens of millions of dollars - which suggests that the bank anticipates little AIG style backlash from a bailout weary public. The very same public whose taxpayer dollars prevented Goldman from going the way of Bear Stearns and Lehman last autumn.

As Mike Lux indicated in the Huffington Post, the underlying message is: See you if you can try to stop us, because we know you can't.

And of course they are right because Obama's economic advisors actually equate a healthy financial sector with a healthy economy. Is this assumption correct?

More than half a century ago, then-General Motors President Charles Wilson (in his Senate confirmation hearings as Eisenhower's Defense Secretary) was misquoted as having said, "What's good for General Motors is good for the country."

That remark came to epitomise the auto giant's arrogance, although what Wilson actually said was, "What is good for the country is good for General Motors, and what's good for General Motors is good for the country" in response to a question as to whether (in his future government capacity as head of the Pentagon) he could ever envisage taking action in the nation's defense interests which might compromise his old company. Wilson acknowledged he could but the quote indicates that he could not envisage circumstances in which the interests of GM would not be coincident with those of the country.

And in the 1950s, when GM - as the world's leading automobile manufacturer, one of the country's largest Fortune 500 employers, working with a strong UAW (headed by Walter Reuther) - was in the vanguard of progressive social legislation and work practices, you could make a reasonable case that Wilson's argument was right.

Not so for Goldman Sachs. Their trading activities add nothing to the real economy. In essence, the company employs a bunch of financial engineers now working with virtually free funding (and guaranteed duration risk, courtesy of the Federal Reserve), who speculate with FDIC guaranteed money for a living: they leverage up the balance sheet and then flip things for a profit. In fact, Goldman's CFO, David Viniar, happily conceded that GS continued to benefit from having virtually no direct exposure to the retail consumer business, despite the fact that the company has now converted itself into a fully fledged commercial bank.

As things stand today, that decision seems sensible. The traditional banking business (you know, the kind which used to make consumer and business loans and hold these loans on the books until maturity - the role which provided the historic rationale for government support of the banks since the days of the Great Depression) continues to perform abysmally. Nine months after accepting more than $200 billion in government rescue funds aimed at preventing a collapse of the financial system, U.S. banks are girding for more losses from mortgages, credit cards and other businesses linked to consumers, while their underwriting and trading units generate revenue at or near all-time highs.

JP Morgan CEO, Jamie Dimon (reputably, Obama's favourite banker), predicted more losses on consumer loans and said credit cards probably wouldn't be profitable next year. The lender boosted its loan loss reserve by $2 billion in the quarter, adding to the $28 billion set aside to cover credit losses as of March 31. And Citigroup's CEO, Vikram Pandit, acknowledged that "Our most significant challenge now remains consumer credit."

Consumer credit would be less of a challenge if the nation's fiscal resources were directed toward boosting aggregate demand, rather than the bottom lines of the banks. Similarly, the economy would be better served if our smart financial engineers worked in more productive sectors--science, industry, health care, alternative energy, etc.

The media reaction to the GS results was most instructive. Rather than celebrating the bank's results as a sign that our economy is on the mend, most publications focused on whether they would be some sort of regulatory backlash. Judging from the reaction of Lawrence Summers - who says that the return to financial health of the banks is a sign that our economy is getting better -neither Goldman, nor any of the other banks, has anything to worry about.

Speaking at The Peterson Institute for International Economics, Summers said that the ability of certain large banks to pay the Treasury back for large infusions of taxpayer money is a "positive and favourable sign."

"It's crucial to recognize that the increased health of financial firms is a positive indicator for the economy," he said.

I would suggest that Mr Summers take a look at the earnings announcements of some of the more representative Main Street companies, before making such a bold pronoucement.

General Electric announced earnings last Friday, with results continue to suggest severe economic contraction. Revenues were down 17% - another double-digit contraction, and this is particularly troublesome in what it says about the global economy, given GE's global reach. Even these results unduly flatter GE. A closer analysis suggests that a full 25% of GE's annualised earnings are a by-product of US government FDIC guarantees on their funding. Reports the Washington Post: "Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been 'powerful and helpful' to the company, GE chief executive Jeffrey Immelt acknowledged in December.

GE's finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government's historic intervention in the financial crisis."

Now, it is impossible to know exactly what the margin is on each issuance GE paper was without closely analysing what the spreads were on each day that they issued FDIC guaranteed paper, but If you just use a 4% spread on that $80bn where Bloomberg says that credit default swap paper of GE Capital is trading at, you get something like savings of over $3 billion per year.

Airlines and hotels also give a better indication of the state of the real economy than the financial sector. The head-in-the-sand management which run the nation's largest airlines and hotels have long been claiming that the disappearance of business travellers from their planes and properties was just a cyclical phenomenon. Some were even insisting that they were seeing those fabled "green shoots" of recovery.

Well, the reality is very different; it is clear a major realignment of business travel is under way. The parent of American Airlines kicked off the second quarter reporting period on Wednesday (July 15), by announcing that its revenue declined 21 per cent and a loss of $390 million. The 16th was Marriott's turn and the hotel giant reported a 20 per cent decline in second-quarter and a 76 per cent slide in profit. And then there are the little anecdotal things: The owner of the posh Four Seasons San Francisco defaulted on a two-year $90 million loan and the now-closed Watergate Hotel in Washington will go on the auction block next week since the owners have defaulted on their loans. Commercial real estate remains the one big leg of the real estate stool yet to collapse.

And premium-class travel plummeted for the 10th consecutive month. According to the airline trade group IATA, year-over-year international premium-class travel fell by 23.6 per cent in May compared to a 22 per cent decline in April and a 19.2 per cent fall in the first quarter.

This tends to put the underlying reality of our economy in better context. In the words of former NY Governor Eliot Spitzer, "We have saved financial services, we have not created a single job. We are still bleeding jobs." And more taxpayer dollars if the latest bonuses approved to de facto bankrupt AIG are sanctioned (again) by the Obama Administration. I suspect that as the year progresses and the promises made by Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke that asset sales would defray the cost of the AIG rescue are shown to be empty, AIG is going to be forced to go back to the US Treasury for additional funds. Already, the policy guarantees of AIG's two most important insurance underwriting units to various AIG affiliated insurers have effectively rendered these key operating units unsalable, which has led the lead buyer to pull out of the bidding process. It is almost inevitable that there will be a further request for bailout money from the government later this year.

Of course, we supposedly cannot afford yet more bailouts because our President keeps saying that we're running out of money (he said it again, jokingly, at last week's baseball All-Star game). The supposed scarcity of funds, however, only applies to things like health care and social security, not the financial sector. So the later in the year when the inevitable AIG request comes, the more angry will be the response from the Congress and the American people. Yet President Obama, Treasury Secretary Geithner and Lawrence Summers remain utterly oblivious to the neo-populist flames they are fanning by perpetuating these absurd and manifestly unjust policies.

Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.

Roosevelt historian David Woolner shines a light on today’s issues with lessons from the past.

After trillions of dollars in losses on Wall Street, massive bailouts, the collapse of the American auto industry, rising unemployment and a mortgage foreclosure crisis not seen since the Great Depression, it hardly seems surprising that the American people want answers. They want to know why we find ourselves in this mess. They want to know how this crisis happened. They want to know which institutions and practices were to blame. They understand that the severe downturn in the real economy on Main Street is directly linked to the meltdown in the banking and financial sector on Wall Street. They are not fools. They want answers and they want real change, and their patience for equivocation is wearing thin.

Just over three quarters of a century ago, the mood in the country was not much different. The people wanted to know what caused the great crash on Wall Street; what brought on the Great Depression; why the banking system had collapsed; why they were out of a job; and most of all, how could we be sure this would never happen again.

To find the answers to these questions, Congress launched a formal inquiry under the direction of the Senate Committee on Banking and Currency. The hearings began on March 4, 1932, and by the time FDR assumed office one year to the day after the hearing began, they were widely known as "the Pecora Commission," thanks to the relentless energy and zeal of the committee's chief counsel, Ferdinand Pecora.

Pecora, an assistant district attorney for New York, assumed his post in January 1933, after his two predecessors had been dismissed for their lackluster performance and just as the commission was about to wrap up its work. His principle assignment was to write the final report. But after closely examining the records of the hearings, he came to the conclusion that the committee's work was incomplete and as such pressed his Senate employers for an extension of the hearings. By this point FDR had won the election and as President-elect he not only agreed with Pecora's request, but quietly urged him-as well as the committee's chairmen-on. Pecora, who as the son of an immigrant Italian shoe-maker from Sicily represented the antithesis of the New York banking establishment, did not need much prodding. He ploughed into his work and was ruthless in his pursuit of the truth. He thought nothing of grilling such prominent financiers as Richard Whitney or J.P Morgan, Jr.

The revelations that the hearings disclosed under Pecora's leadership, including the fact that J.P. Morgan, Jr. had paid no personal income taxes for the past three years, further outraged the public and helped inspire the sweeping banking and financial reforms of the first months and years of the New Deal. These included the all-important Glass-Steagall Act, the Securities Act, and the Securities and Exchange Act, which led the creation of the Securities and Exchange Commission in 1934.

For the most part, the banking and financial establishment vehemently objected to these provisions, even going so far as to say that they would undermine the recovery. But the public, better informed about the causes and consequences of the collapse of the financial sector, made it clear that they wanted change--and they got it.

For nearly seven decades--until they were largely eroded away in the 1990s-the reforms of the early New Deal stood as the bedrock of our financial system. If we are going to try to build a "new financial foundation" shouldn't we be sure we are solid ground before were start? Shouldn't we launch our own Pecora Commission to get to the bottom of what happened and why? Isn't it time the American people received the answers they deserve?

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.