Protect consumers from financial predators

CONGRESS now proposes to create a Consumer Financial Protection Agency. If it will actually do something to oversee mortgages and other financial products, we are for it.

The Seattle Times series on Washington Mutual showed the bank was lending billions in such bizarre products as "liar loans." That product should have been banned.

An agency whose central goal is regulating consumer financial products is needed. But let us go into the venture with some skepticism about how this will promote stability and safety of the system as a whole.

Most regulators didn't see the crash coming.

PBS's "Frontline" recently told the story of one who did, Brooksley Born of the Commodity Futures Trading Commission. She raised the alarm about derivatives back in the Clinton administration. More powerful regulators told her she was wrong.

During the Bush administration, Simon Johnson of the International Monetary Fund raised an alarm about financial risk. He was ignored. He went to talk to the French and Germans — and they ignored him.

We hear these stories and we imagine the good the regulators could have done if given their way. But in each case, regulators were given their way. They were just the wrong ones.

Regulators can try to do better. They should. But in the financial world, they will never be as close to the action as the people they regulate, nor as well-paid. Always there will be a risk of inattention and error — and also of lobbying.

Regulation is an effort, not a guarantee.

Rob McKenna, Washington state's attorney general, stresses that point. He notes that the Securities and Exchange Commission investigated Bernie Madoff several times. Madoff was engaging in a multibillion-dollar fraud, and the SEC didn't see it.

Alan Hess, professor of finance at the University of Washington, tells the story of two guests who spoke in a class he had at Berkeley. One was a risk manager from Bank of America. One was a regulator from the Federal Reserve Bank of San Francisco. The B of A guy "was incredibly more advanced," Hess recalls.

Hire regulators — yes. But that is not enough. Finance requires fixed rules.