Monday, December 14, 2015

REPOST: Organizational Form Affects Decision-making

Organizational form affects decision making

The new Consumer Financial Protection Agency seems designed to be accountable to no one:

As an unaccountable bureaucracy with a single head, the bureau will be susceptible to bureaucracy’s worst pathologies: a tunnel-vision focus on the agency’s regulatory mission, undue risk aversion and agency overreach. While a more coherent consumer-protection regime is needed, consumer-protection goals often can conflict with other goals, such as promoting competition, lower prices and expanded choice for consumers; and ensuring safety and soundness.

The FTC, which enforces identical consumer protection laws, is organized along functional lines, with attorneys and economists each writing memos to a bipartisan Commission. By design, this results in conflict between the economists and attorneys, which allows benefit-cost analysis done by economists to be heard at the highest levels of the organizations.

Watch the organizational design of the new agency. I suspect it will put economists, if it has them at all, under the supervision of attorneys to reduce their influence, as was done during the FTC early years.

1 comment:

  1. What is the problem?
    A new agency that consist of 5 members and having a single director management structure (leaving the agency’s actions subject to the whims of a single individual) with an unprecedented power and lack of oversight. An unaccountable bureaucracy that would raise credit costs, restrict access to credit and do nothing to address the underlying problems of misaligned incentives that caused the financial crisis.

    Do the divisions have enough information to fix the problems? Yes, each division (Federal Reserve Board, Congress, House of Representatives and etc.) possesses good information about the new Bureau of Consumer Financial Protection.

    Do they have the incentive to fix the problem? NO, there are no incentives to fix the problems right now. While a more coherent consumer-protection regime is needed, consumer-protection goals often can conflict with other goals, such as promoting competition, lower prices and expanded choice for consumers; and ensuring safety and soundness. For example, the law gives the bureau new authority to regulate slippery mortgage brokers. Although stricter regulations of mortgage brokers theoretically could reduce fraud (although there is no evidence that this is the case) brokers also provide a salutary competitive check on traditional bank lenders.

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