Written testimony of J. Bradley JansenSubmitted for the record to theU.S. House Committee on Financial ServicesSubcommittee onFinancial Institutions and Consumer CreditHearing on Improving Consumer Financial LiteracyUnder the New Regulatory SystemJune 25, 2009

Chairman Gutierrez, Ranking Member Hensarling, members of the subcommit-tee, thank you for allowing me the opportunity to submit testimony on this impor-tant question. My name is Brad Jansen, and I am the director of the Center forFinancial Privacy and Human Rights. CFPHR was

founded in 2005 to defendprivacy, civil liberties and market economics and

is part of the Liberty and PrivacyNetwork, a Washington, DC-based 501(c)(3) organization.I would like to applaud the committee for recognizing the importance of privateactors in the campaign for financial literacy. Unfortunately, the often counter-productive influence of the relevant government agencies is not explored. Thisstatement aims to fill that void by exploring:

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Harmful leadership by federal regulators concerning consumer mortgages,

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Problems associated with pre-empting state subprime lending laws, and

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Importance of protecting independent consumer watchdog groups

sites.While some general principles of financial literacy are universal, the dynamic,changing capitalist system we have continues to develop ever more specializedand complex financial products to meet consumer demand. The benefits of thissystem can be limited if financial literacy lags.Governmental regulations generally react more slowly than the private actors.Such delays can retard consumer financial literacy. The first rule should followthe physicians

Hippocratic Oath and “First, do no harm.”

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Center for Financial Privacy and Human Rights bjansen@ﬁnancialprivacy.orgPO Box 2658

Washington, DC

20013-2658 Tel. 202-742-5949 ext. 101

Policymakers need to establishing general rules (against fraud, reasonably un-derstandable disclosures,

etc.) and recognize that since private regulationmoves faster to meet consumer concerns governmental regulation should aug-ment and support that approach--not undermine it. Similarly, states, the “labora-tories of democracy,” are closer to the people and often contribute to this discov-ery process. The Uniform Commercial Code could be encouraged to “harmo-nize” state leadership and simplify consumer protection regulations.In short, a “bottom up” approach is better than a bureaucratic “top down” one.

As George Soros explains, “While markets are imperfect, regulators are evenmore so. Not only are they human, they are also bureaucratic and subject to po-litical inﬂuences, therefore regulations should be kept to a minimum.”

Soros also rightly cautions against excessive credit-induced financial bubbles.Relatedly, very few Americans understand that role that central bank monetizingof government debt plays in causing inflation and how that affects consumer fi-nancial products.

The Fed's Follies In Regulation of Consumer Mortgage Products

For about the last one and a half decades, the Federal Reserve had primary in-fluence and, in some aspects, formal control over many consumer financial prod-ucts in America. Now, as we are collectively going back and re-examining thestructures and policies that led to the financial crisis, it is being realized that thisarrangement may have been a key contributor to the mess. We are realizingnow that, in fact, much of the prosperity at the time was just an illusion created asa direct consequence of policies that tended to encourage, if not inflate, eco-nomic bubbles.Everyone is familiar with the criticism that the Federal Reserve Board kept inter-est rates too low for too long after the NASDAQ bubble burst. Whatever degreeto which this is true (complicated with foreign central bank purchases of US secu-rities), what has received less attention are the comments of Federal ReserveBoard Chairman Alan Greenspan regarding exotic mortgage products and therole they may have played in build up to the financial crisis.Greenspan told the 2004 Credit Union National Association conference, “Ameri-can consumers might benefit if lenders provided greater mortgage product alter-

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Center for Financial Privacy and Human Rights bjansen@ﬁnancialprivacy.orgPO Box 2658

Washington, DC

20013-2658 Tel. 202-742-5949 ext. 101

See Privacy Rights Clearinghouse, “'Reasonably understandable' means clear and concisesentences, plain language, active voice.”http://www.privacyrights.org/ar/GLB-Reading.htm

Nobel prize winning economist F. A. Hayek explained these issues well in his “The Use ofKnowledge in Society” essay.http://www.econlib.org/library/Essays/hykKnw1.html

George Soros, The three stepsto ﬁnancial reform, Financial Times, June 16, 2009http:// www.georgesoros.com/articles-essays/entry/the_three_steps_to_ﬁnancial_reform/

natives to the traditional ﬁxed-rate mortgage.”

USA T oday

reported, “Whileborrowers can refinance fixed-rate mortgages, Greenspan said homeownerswere paying as much as 0.5 to 1.2 percentage points for that right and the pro-tection against a potential rate rise, which could increase annual after-tax pay-ments by several thousand dollars . . . He said a Fed study suggested manyhomeowners could have saved tens of thousands of dollars in the last decade ifthey had ARMs. Those savings would not have been realized, however, had in-terest rates shot up.”Note that Mr. Greenspan expressly endorsed adjustable mortgages over tradi-tional, safe fixed mortgages--this is going further than simply suggesting them asan additional possibility. This is all the more puzzling given that the Federal Re-serve was still holding interest rates at historical lows--exactly the environment inwhich consumers should be picking fixed mortgages, not ad justable ones. As itturns out, “0.5 to 1.2 percentage points” was a pretty reasonable amount to payfor the right not to have one's mortgage payment shoot up by 30-200% on them.So this was not only extremely bad advice, but diametrically opposed to the op-tion most consumers should have picked--and coming from the nation's top fi-nancial authority.These comments, while expressing no specific policy, clearly set the tone for in-dustry and consumer behavior. At the time, Mr. Greenspan was considered the“Maestro” for past economic performance, and by some the “most influential manin the world”. People believed--perhaps rightly so--that the Greenspan Fed wasresponsible for making the 2000-2001 recession “short and shallow,” as well asexpertly handling the post-9/11 environment. When such a person at such apowerful and influential institution voices a preference for one financial productover the other, it inevitably becomes de facto policy.More disconcerting is the above combined with another incident at the FederalReserve. Consider Edward Gramlich, a Democrat who was one of seven Fed-eral Reserve Board governors from 1997 to 2005, who reportedly proposed toMr. Greenspan while predatory lending was a growing concern that the Fedought to ensure its examiners look into the offices of consumer-finance lenders ofthe bank holding companies under its authority. In another example of govern-ment regulation failure, Mr. Greenspan dismissed the idea.

As Chairman Frank has reiterated, giving the Federal Reserve additional statu-tory authority has not served consumers well, such as with subprime mortgages.The above episode illustrates another example of Hayek

s caution against the

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Center for Financial Privacy and Human Rights bjansen@ﬁnancialprivacy.orgPO Box 2658

Washington, DC

20013-2658 Tel. 202-742-5949 ext. 101

Chairman Alan Greenspan, “Understanding household debt obligations,” Credit Union National Association2004 Governmental Affairs Conference, February 23, 2004, Washington, D.C.http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm

Greg Ip, “Did Greenspan Add to Subprime Woes?,” Wall Street Journal reported on June 9th,2007,http://online.wsj.com/article/SB118134111823129555.html