Hi everyone--newb here.
I've heard lots of clamoring from some people that we need a consumer financial protection agency and this article probably represents the views of those who support the creation of a consumer financial protection agency: hXXp://www.time.com/time/politics/article/0,8599,1964469,00.html
Do we need one? If not, why? And is there a free-market alternative available?
We don't need a consumer protection agency. Remember the Bernie Madoff case. A reasonable investor would've checked out his program using an independent investment advisor before investing any substantial amount of money. But since we have a government agency (in this case the SEC) whose job it is to prevent ponzi schemes, many people didn't bother. When a few prudent people did and alerted the SEC, the government still didn't do anything.
There's no reason to suspect it will work any differently with a new CFPA: people will rely on the government to protect them and thus will invest more recklessly than they otherwise would have, and since it's the government, the CFPA will be completely incompetent at protecting anyone from anything.
A free market solution is already partially in place. Absent government interference, we'd probably see more emphasis on independent financial advisors, credit rating services and auditing firms. It would be in their best interest not to sell toxic assets, because if they did, their reputation would be ruined and they'd go out of business (admittedly that's not too big a deal if we're just going to bail out anyone who goes bankrupt so we have to stop doing that too). And if you buy financial products from a company with a good reputation, you'd probably be able to buy some inexpensive insurance on it, so even if you do get screwed, you wouldn't loose (much) money.
I'm not a finance professional, and I don't pretend to know how all the details would work. But the bottom line is that we have two choices on how to prevent people from making bad investments. One is a government agency with no real incentive to succeed, that everyone has to pay for whether they use the service or not, that has the legal authority on the use of force, can prevent innovation, and when it fails its budget is increased. The other is a system of voluntary exchanges where if people do a good job they make money, and if they do poorly they go out of business.
I dunno, I'm sure a lot of people will get rules passed against companies that would otherwise not be passed but at the same time, there's always the risk that chrispy pointed out.
"Do we need one? If not, why? And is there a free-market alternative available?"
Consumers can have whatever they want as long as they are willing to pay for it. There is nothing special about safety or protection, for they are just economic goods and services no different from other goods and services. The government is basically going to coerce everybody into buying their alleged services for protection at the expense of other more urgent needs of consumers, some of which may actually be more effective protection offered by the market. There is the saying: Bad regulation drives out good regulation
Like all government regulations, there will be "unintended" consequences. And like all government regulations, consumer sovereignty is simply substituted for government control. As far as producers are concerned, their lost of control is tantamount to private property confiscation.
Now, increasingly, consumers will just assume everything is safe instead of doing their own due diligence.
Madoff couldn't have happened without the SEC.
Vioxx deaths couldn't have happened with the FDA.
When there is a monopoly regulator, people just assume it does its job. And they stop looking out for number 1.
NewLiberty: "Madoff couldn't have happened without the SEC."
That's going a little overboard, don't you think? The market doesn't promise any prospect of flawlessness. As long as we live in a world of scarcity, we will have to continue to choose between tradeoffs. It's just that the market offers a rational method, or a process, by which these tradeoffs can actually be made productively, while government can only sabotage this process.