Zywicki in Newsweek: Financial Product Safety Commission Not a Good Idea

Proposals to form a Financial Product Safety Commission modeled upon the Consumer Product Safety Commission are an inappropriate attempt to prevent the introduction of poorly designed financial products to the marketplace, according to Professor Todd Zywicki.

"A credit card is not an exploding toaster," says Zywicki, pointing out that unlike faulty consumer products, complicated loans are actually suitable for some borrowers.

Zywicki's comments are part of a Newsweek article about Harvard professor Elizabeth Warren, a bankruptcy scholar who was appointed to head the Congressional Oversight Panel as it critiques the government's bailout of the banking industry and attempts to provide reform to the nation's financial system.

The Debt Crusader, Newsweek, April 20, 2009. By Daniel McGinn.

"Warren's big idea is to create a Financial Product Safety Commission modeled after the Consumer Product Safety Commission, which ensures the safety of small appliances and toys; such an agency would have kept the poorly designed mortgages that caused the credit crisis off the market entirely. 'This crisis started with the cheating of American families, and [solving it] has to begin there, too,' she says. It's just one of the ideas she's promoting in her new role. Each month, her committee's reports create controversy. For February's missive, the panel hired an outside investment firm whose analysis concluded that the Treasury Department had overpaid by one third for the ownership stakes it took in big banks last fall. In a report released last week, the panel explored how, in previous financial crises, liquidating insolvent banks and sacking their managers led to a quicker, cleaner resolution of the mess.

"Some of her ideas have sharp critics. 'A credit card is not an exploding toaster,' says Todd Zywicki, a law professor at George Mason University, because unlike faulty consumer products, complicated loans are actually suitable for some borrowers. Zywicki says Warren's views are extreme because she views every lender as exploitative and every borrower as a hapless victim. Financial-industry lobbyists are even more critical, slamming her for shoddy scholarship and radical ideas (though they decline to do so publicly). Critics also question just how much influence her committee will have. 'It has no authority, it doesn't have any enforcement power, it [only] makes suggestions--it's a pulpit at best,' says one lobbyist."

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