Why we need an independent consumer financial protection agency, and why Elizabeth Warren should run it

I know it is too late now, but I want to make the point anyway.

I remember the first time I heard Elizabeth Warren speak. It was at a conference on consumer credit hosted by Georgetown and the estimable Mike Staten--I think it was in 2002. Elizabeth Warren spoke about consumers getting steered into mortgages--and in particular high balance mortgages and long-term mortgages. She argued that this was bad for consumers; she argued low balance, short maturity mortgages would mean consumers would pay less interest, and that this would leave consumers better off.

My reaction was that she was nuts. After all, my economist's brain told me, present value is present value. She was ignoring the opportunity cost of equity. She was, I thought, offering consumers horrible advice.

Now her advice looks pretty good. Lower leverage means lower risk, and households--particularly those without financial assets--are not in a good position to manage risk. Moreover, low balance short amortization mortgages nudge people into saving, and may explain why people of my parents' generation (who paid off their mortgages by the time they were in their 50s) are in better shape financially than people of my generation (who kept taking equity out of their houses).

The problem with the Fed is not that people there aren't smart and well-intentioned--they are. The problem is that most people there were trained to think like me. I hate to say it, but there may be times when a smart, caring lawyer understands how the world really works better than a smart, caring economist.