The Mario Savio Memorial Lecture
Remarks as Prepared for Delivery
Thursday, October 28, 2010
Thank you, Maria, for that very kind introduction, and thank you to the Mario Savio Lecture Fund’s Board of Directors and Advisory Board for inviting me to be here tonight. It is an honor to give this lecture, dedicated to the memory of a man who tried to tell truth to power and symbolized a generation’s attempt to bring change to our country.
When I accepted the invitation to deliver the Savio Lecture last spring, my life was very different.
By day, I was a law professor at Harvard teaching contracts to first year students. I also served as the chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, or TARP. I tried to ask hard questions on behalf of American families, and I put some very tough questions to the administrators of TARP both before and after the Administration changed hands.
By night, I was a dogged volunteer, speaking with anyone who would listen about the tricks and traps hidden in the fine print of mortgages, credit cards, remittances, and other consumer credit contracts. Wearing that hat, I knocked on doors in Washington, I wrote op-eds, and I pushed as hard as I could for Congress to create a new consumer agency in the aftermath of the financial crisis.
I was not the only one pushing hard. There were many “bodies upon the gears,” as Mario might put it: hundreds of concerned citizens and groups who worked around the clock to help make sure that powerful interests didn’t quietly kill consumer protection and that we got a vote on a serious, tough new agency. We wanted an up or down vote so everyone could see whether Congress supported an agency that would be a voice for families.
We got our vote, and that’s when things changed.
A horde of lobbyists fought us every inch of the way, but, over the summer, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, with our tough little agency playing a starring role. On July 21, the President signed the bill into law and announced to Americans that there will now be “a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – looking out for people as they interact with the financial system.” For the first time in our history, there would be an agency devoted solely to the economic strength of American families.
Last month, President Obama asked that I serve as an Assistant to the President and Secretary Geithner asked that I help him stand up the consumer bureau so we could get to work on giving consumers a voice and getting rid of the tricks and traps hidden in the fine print of consumer credit contracts.
Changes come from many directions. Those of you who know me may have heard that I have two delightful little granddaughters who are the light of my life. Just hours ago, baby number three arrived, a little boy. When I leave here tomorrow morning, I will fly to Los Angeles and will see him for the first time. While I’m in Los Angeles, I will also make good on my ironclad contract with no fine print that I will take the little girls trick-or-treating.
Like my grandson, the Consumer Financial Protection Bureau – or CFPB – is just entering its infancy. I feel good to know that he will grow up in a country where the CFPB is devoted to being his voice in Washington. I am also glad to help set this new agency on the path to strengthen the economic health of American families.
When I talk about the new agency, I mostly talk about the very specific changes it can make for families. I talk about a broken credit card market in which fine print rains down on families, making it nearly impossible for anyone without a law degree, an accounting degree and a hundred hours to burn to determine the true cost of credit or to make straightforward comparisons among products to determine something as basic as which one is the cheapest.
I talk about significant changes that are already in place like the CARD Act, which was signed into law by President Obama in 2009 and now bans some of the most abusive credit card practices. Right now, that law is making millions of families economically safer.
I ask people to imagine what a clean, competitive credit market – a place with no fine print to hide tricks and traps – can do for American families.
I talk about how this agency can make families economically safer every chance I get, but tonight I want to break some new ground. I want to reflect on what it means to be at the beginning, to think about the possibilities for this start-up agency. Pause to consider: we are building a new federal agency from the ground up. We should think broadly about credit and American families, but we also have a moment right now to think about what it means to build a new agency in a world where information travels at the speed of light.
In our early republic, the government was not distant from the people that it governed. The New England town hall was emblematic of a world in which those who ran the government were well-known as neighbors, kinsmen, and friends. This made sense in a world in which commerce was largely local: the mill, the livery, and the bank were just down the road. Those who served in government and those who needed the services of government were closely connected.
Fast forward to the 20th century. Commerce was no longer predominantly local, but national. Industrial manufacturing displaced the individual craftsman, scientific management routinized creative work, and finance began its march toward consolidation into larger and larger banks. Theodore Roosevelt famously tried to adapt Washington to the changes he saw in commerce. Only a strong national government, he thought, could effectively balance against the influence of powerful national industries. Government agencies were created, and professional public servants began to emerge, working on behalf of the people.
We may take it for granted, but we have all profited from the rise of agencies watching out for our welfare. The Food and Drug Administration monitors the safety of our drugs, the Consumer Product Safety Commission makes sure that toys covered in lead paint or car seats that might collapse are kept away from our children and grandchildren, and the Environmental Protection Agency tests the safety of the air we breathe and the water we drink.
At the same time, our public servants have often appeared faceless, nameless and distant—much like the industries they regulate. In the early 20th century world in which communication capacities had increased only marginally from a century earlier – a world in which letters and newspapers were the main source of dialogue between agencies and people – that structure was the best we could do. But today, we can imagine an agency designed for the 21st century and for our new world of commerce in consumer financial products and services.
Today, information is king—but information is not evenly accessed by all. Repeat players can understand a complicated financial product that the rest of us have difficulty parsing in full. Lenders can hire teams of lawyers to work out every detail of a contract, then replicate it millions of times; a consumer doesn’t have the same option. And with technology to keep track of every purchase, to watch every payment choice, to observe and record the rhythms of our lives, a sophisticated seller can harvest that information—sometimes in ways that provide value, but sometimes in ways that manipulate customers who will never see what happened to them.
We can build a government agency that is responsive to the dynamics of our time, just as the town meeting responded to the 18th century and the classic government agency to the 20th. To get there, we need to re-imagine the new consumer agency, using changes in technology to propel us. I can think of no better place to do some re-imagining than in the Bay Area, the birth place of the free speech movement and the home of so many companies that have transformed the way we communicate through technology. So here are three questions to get us started.
Who Has a Voice?
Let’s start with who has a seat at the table. The industry hires lawyers and lobbyists, who produce papers and research and who monitor everything that happens. The industry pushes its views to the agency and to the public about the right direction for the agency, and, as you might expect, the right direction turns out to be the one that is good for the industry. That’s the industry’s right, but for the American public, those who aren’t hiring lawyers and lobbyists, the field is tilted against them. The public, the people to be served, far too often fade into the background.
When an agency loses sight of the public it is designed to serve, academics say it has been captured.
The new consumer agency can develop tools to help level the playing field and discourage capture. The American people can have not just one, but thousands of seats at the table. Even before the agency officially opens its doors, it can solicit information from the American people about the challenges and frustrations that they face with consumer financial products day in and day out—and it can organize that information and put it to good use. Data from the public can inform priorities, and it can signal problems both to consumers and businesses.
Information technology can allow us to hang out a virtual shingle in front the Agency and to declare our intent to the world. It’s a lot harder to let yourself fail – and a lot easier for the public to hold you accountable – when you’ve transparently declared your mission and shared information the public can use to measure your success in meeting it. Technology can force this agency to remain true to its goals.
Transparency is obviously key, and we’re ready to get started. As a part of this, I am committed to making public the advocates, lobbyists, and other stakeholders I meet with. Every year, we’re also going to produce an annual report on what we’re up to: think of it as a State of the Union for Consumer Financial Issues. But remaining focused on the mission requires more than just transparency—it requires engagement. So the second thing we’ll do is make it easy to interact with the agency.
And that’s our second question: How Can the Agency Use Information to Perform Better?
In a world of experts, it’s the experts that frame the questions to be asked, isolate the problems, sort through the data (if there are any), and try to design solutions—always with the industry looking on and chiming in. But we can do this differently.
A data driven agency won’t be about conventional wisdom. It will be about data. And those data should come from many sources—from financial institutions, from academic studies and from our own independent research. We can reinforce that approach by making sure that our analysts come from a diversity of backgrounds—finance, law, economics, sociology, housing.
But we can also gather data directly from the American people by asking them to volunteer to share with us the experiences they have with consumer credit products. We can open up our platform to families across the country who want to tell us what has happened to them as they have used credit cards, tried to pay off student loans, or worked to correct errors in a credit report. We can learn more about the loan application process, about what people see on the front end and what happens on the back end. We can learn about good practices, bad practices and downright dangerous practices, and we can report on the good, the bad and the ugly to increase transparency and to push markets in the right direction.
Normally, agencies use supervision and lawsuits to enforce the law. This agency will do that as the cop on the beat watching huge credit card companies, local payday lenders, and others in between. Technology can help us do that better, by making sure our enforcement priorities are tightly connected to the financial market realities as experienced by customers every day.
New technology can help us supplement the cop on the beat by building a neighborhood watch. The agency can empower a well-informed population to help expose, early on, consumer financial tricks. If rules are being broken, we don’t need to wait for an expert in Washington to wake up. If we set it up right from the beginning, the agency can collect and analyze data faster and get on top of problems as they occur, not years later. Think about how much sooner attention could have turned to foreclosure documentation (robo-signers and fake notaries) if, back in 2007 and 2008, the consumer agency had been in place to blow the whistle before the problem became a national scandal.
The agency may also be able to demonstrate how incentives can change when people are connected not only to the government, but also to each other. Through crowd-sourcing technology, consumers can deal collectively with those who would take advantage of them—and can reward those who provide excellent products and services. Imagine scanning a credit agreement and uploading to a website where software can analyze the text of the agreement. A consumer could help the agency spot new agreements on the market and customers could get more information as they make decisions. The new CARD Act requires credit card issuers to submit their agreements to the Federal Reserve for posting. That’s a model we can build on.
Information – fast, accurate information from a variety of sources – has the power to transform the old measures of agency effectiveness.
And then our third question: Who Has the Next Breakthrough Idea?
If any of you have read my academic work, you know I built an entire career on teasing out as much data as I could about American families and trying to make sense of that data.
As a researcher, I understand that data must always be handled carefully, and protection of personal data and proprietary models is paramount. But I also believe that better data, made available to the media, private investors, scholars and others, will, over time, produce better results. When data are widely shared, others can use those data to uncover new problems, to frame those problems in different ways, to propose their own public policy solutions, and, for the entrepreneurs in the group, to develop their own private apps to create something of value. I’ve seen some good ideas in my time, and I’ve learned that those ideas can come from unlikely places. I’m hopeful that, as we drive consumer credit markets toward working better for families, the new consumer agency will be smart enough to encourage – and then to build upon – good ideas that come from far outside the government sphere.
Think for a minute about how more and better data might have helped us avoid the housing finance crash of 2008, a crash that has resulted in millions of foreclosures and cost American families trillions of dollars. Better access to better data could have empowered those on the outside to blow the lid off a faulty housing model, and to do it before terms like “too big to fail” were part of our everyday vocabulary.
These are only three ideas, but notice how they work together. An agency that isn’t captured by industry can write better rules and enforce those rules more vigorously. An agency that shares data is an agency that is harder to capture. And an agency that learns from families is an agency that can make markets
We fought hard to get here, and those who tried to block the agency’s creation have already said that they will be back. Every day, they spend money to find a way to cut back the agency’s power—even before its work has begun.
But we’re scrappy—partly because we have no choice. This agency can succeed. More importantly, it must succeed because we are running out of options.
For more than a generation, we have witnessed a steady deterioration in the economic security of the middle class. Flat wages and rising core expenses caught families in the cross-fire, and millions turned to debt, only to learn that the friendly advertisements were too often an invitation to disaster.
We are in an economic crisis, but remember that it is a crisis that has been decades in the making. Long ago, when America was committed to a robust middle class, an economic boom meant prosperity for working people. In the boom of the 1960s, for example, median family income rose 37 percent. But by the 2000s, economic expansion meant prosperity only for the few. In the boom that preceded the crash of 2008, median family income rose a paltry 1.9 percent. Worker productivity went up, and those at the top got wealthier and wealthier, while those in the middle were barely holding on to their old paychecks. Think about that—37 percent real income growth in good times in the 1960s, 1.9 percent real income growth in the good times of the 2000s. Anyone who wants to understand why America’s middle class is not bouncing back from the 2008 crash should remember that, unlike in early boom-and-bust cycles, middle class families had no parachutes when they were pushed off a cliff in the Great Recession of 2008.
Today’s families have spent all of their income, spent all of their savings, and taken on debt to pay for college, to cover serious medical problems, and just to stay afloat a little while longer. Although some economists tell us the recession is over, we all know the economic pain is not. And we see that whether we measure in unemployment or foreclosures, whether we count in the small businesses or students who cannot get loans, whether the metric is home sales or manufacturers’ inventory.
Families have been pushed and squeezed and hammered for a generation, but we have a moment – right here, right now – to turn a corner. The new consumer agency won’t fix everything, but it gives us the opportunity to help plug a hole in the bottom of the economic boats of America’s families. We have a moment, in one very tangible way, to make something better for millions of hard-working, play-by-the-rules people.
A new baby and a new agency. The task before us is great, but I am filled with hope—and determination.