Laura Rowley Money & Happiness

As the U.S. Treasury, Federal Reserve, and multiple banking authorities reshape the financial industry amid the worst crisis since the Great Depression, which regulator is watching out for the average American? The answer, in a nutshell, is none of them.

Failing on All Fronts

That's why a growing number of economists, academics, and members of Congress support the idea of a federal safety commission for financial products, similar to the Consumer Products Safety Commission, which ensures deadly toys and other goods aren't marketed to consumers.

"It's the job of government is to set the rules that make markets work for the people, businesses, and the economy -- and right now we are failing on all three fronts," says Harvard Law School professor Elizabeth Warren, who first articulated the idea in the journal Democracy.

"Financial products don't have to be idiot-proof, but they should not be deliberately designed to fool people or make risk evaluation difficult," she adds. "The rules of the game matter to all of us -- they're what keep all of us safe. People are losing value on their homes who never took out a subprime mortgage; people are losing jobs who never carried a dollar of debt on a credit card."

An FDA for Mortgages?

Rep. Bill Delahunt (D-Mass.) and Sen. Richard Durbin (D-Ill.) recently introduced bills in the House and Senate that would establish a Consumer Credit Safety Commission to oversee any category of lender that extends credit to borrowers.

"What we're learning from the crisis is that the consumer is unaware of the hazardous instruments they can get roped into," says Mark Forest, spokesperson for Rep. Delahunt. He cites studies that show some subprime borrowers qualified for lower-interest loans, but were steered into more expensive products by mortgages brokers seeking higher commissions.

"There is the notion of caveat emptor, but we don't expect consumers to have to test their own food or drugs -- we have a Food and Drug Administration," says Forest.

Wanted: Regulator

Warren argues that the patchwork of federal and state regulatory agencies with overlapping responsibilities has resulted in "crazy" rules. "The typical credit card contract has gone from one page long in 1980 to more than 30 pages long by the early 2000s, and part of that is required disclosure that is frankly incomprehensible," she says, citing one credit card contract that posted an interest rate with an asterisk leading to 47 lines of fine print.

"The last line said, ‘Notwithstanding the forgoing, the company reserves the right to charge any interest rate it chooses at any time for any reason,'" she notes. "To me that's not an effective disclosure, because basically it said, ‘If you take out credit there, they will charge you whatever they want whenever they want.' That's a very different thing to communicate."

Yale Economics Professor Robert Shiller says the issue isn't one of more regulation, but better focus. "We have regulatory agencies, but not ones with a consumer culture," says Shiller, author of the new book "The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do About It." "We are not calling for a fundamental change of our philosophy, but a way of coordinating the regulatory framework. We want a regulator focused on the consumer."

Spotty Enforcement, Shady Practices

Shiller says he visited the Office of the Comptroller of the Currency and the Federal Reserve a few years ago, and urged them to crack down on predatory mortgage practices. He received little response. "One thing they told me is that's not their main mission -- the OCC is there to protect the banks," he recalls.

Moreover, agencies typically regulate based on the issuer of financial products, not the products themselves, so enforcement is diffuse and spotty. For instance, consumers filed 17,000 complaints about credit cards with the Better Business Bureau in 2004. But the OCC, the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTC) have initiated only a handful of enforcement actions relating to unfair or deceptive lending practices, according to Sen. Hillary Clinton (D-N.Y.), who has endorsed the notion of a consumer credit commission.

A consumer credit commission would help clean companies compete. "As long as the law says we will reward companies that bury tricks and traps in the fine print, a company is almost foolish not to do this," says Warren. She cites a credit card issuer who publicly dropped the practice of universal default -- then quietly resumed it. "It turned out that they couldn't compete [by eliminating universal default] because consumers can't see it," she explains. "Putting a cleaner product on the market didn't drive more consumers in their direction, it just cost money."

David, Meet Goliath

The Delahunt/Durbin bill envisions an agency led by a five-member bipartisan board that would oversee such products as mortgages, credit cards, auto loans, and savings and checking accounts. The commission would "prevent and eliminate unfair practices that lead consumers to incur unreasonable, inappropriate, or excessive debt," including practices or product features that are abusive, fraudulent, deceptive or predatory.

The commission would also collect data on which credit products are most harmful, giving borrowers an objective source to help them make better choices.

Warren hopes that consumers, fed up with rip-offs and bailouts, will demand that Congress make financial products safer -- just as they did for automobiles in the 1960s and the environment in the 1970s. But she admits it would take an avalanche of grassroots effort to overcome the financial services industry, which spent more than $100 million on lobbying over the last five years.

"Polluting industries strongly resisted the creation of an Environmental Protection Agency," she notes. "But there reached a point when the American people said, 'We want this,' and the political influence purchased through political contributions had to give way to the will of the people." (To support the Consumer Credit Safety Commission bill, email Rep. Delahunt.)