Tuesday, January 01, 2013

Abandon all Constitutions, Ye who enter Congress

The Constitution of the United States of America authorizes Congress to levy taxes. But now Congress has authorized an agency to obtain revenue without annual Congressional action. That agency is the Consumer Financial Protection Bureau. Created by the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010" as a bureau within the Federal Reserve System, the CFPB gets its funding from the Federal Reserve (the “Fed”) rather than from the US Treasury. The Bureau thus escapes Congressional oversight.

The main purpose of economic science is to enable us to understand the implicit reality beneath superficial appearances. The superficial appearance of the CFPB is that it is not a burden on the taxpayers. This is because in appearance, the Fed is not funded by the taxpayer, but rather from the interest income from the Fed’s huge bond holdings. In appearance, the Fed makes a profit, because the interest income of the Fed is greater than its expenses, and the Fed returns the “profit” back to the US Treasury.

Every interest dollar spent by the Fed is a dollar not returned to the Treasury. Thus when the CFPB takes some of that interest money, these are funds that would have gone to the Treasury, but are now shifted to the CFPB. If we want to give the CFPB a nickname, as we do for example for Fannie Mae, we could call CFPB the Crafty Poobah. The CFPB indirectly taxes the public by reducing the funds that would otherwise go to the Treasury, therefore requiring greater taxation to achieve the same level of spending.

Of course the U.S. Treasury also borrows funds, but the economic reality is that every dollar borrowed by the government is in effect a tax on somebody. Borrowing postpones the tax payment, but not the actual tax. When government borrows a dollar, it imposes at that time an implicit tax, to be paid explicitly later, with interest. Either a taxpayer will pay more taxes in the future, or else a bondholder will be taxed by the reduction in the value of his government bond, such as from higher inflation or from a repudiation (cancellation) of the debt.

There are free lunches, but the funding of the Crafty Poobah is not one of them. Not only does the CFPB indeed impose a tax burden, but by bypassing Congress, the CFPB violates the Constitution. The agency can spend money without an appropriation by Congress. The CFPB is authorized to request up to $200 million in discretionary appropriations if the funds authorized by the Dodd-Frank Act are not sufficient for its budget.

The CFPB also imposes costs via regulations on financial firms, on top of the regulations already imposed by the Fed, the FDIC, and other regulatory agencies. The law that set up the CFPB has given the Bureau a broad and vague mandate to “protect” consumers.

The CFPB consolidated consumer-related programs in the Federal Trade Commission, the Federal Deposit Insurance Corporation, and other agencies. so to some extent, it transferred funding from them. But the Bureau also duplicates the programs of other agencies, including the Securities and Exchange Commission, and the state consumer protection departments.

In his article “CFPB Needs a Day in Court” in Human Events 17 November 2012, George Will notes that sixty percent of its employees in 2012 had lavish salaries of more than $100,000 a year, and five percent were making $200,000 or more. He points out that heavy regulation favors the big banks over the small ones, as the big ones already have an army of lawyers and accountants to handle the rules.

Also consumer “protection” can end up hurting consumers and the economy by limiting access to credit. One of the reasons the economic recovery from the Depression of 2008 has been slow is credit constraints, in large part imposed by the federal government. The typical pattern in the “business” cycle is for credit to be too loose during the boom and too tight after the crash.

Congress and the courts have voided the U.S. Constitution in many ways, such as by ignoring the 9th Amendment, by blurring the Constitutional distinction between direct and indirect taxes, by stretching the meaning of commerce among the states, and by pretending that all its spending is under the rubric of the “general welfare” rather than the particular welfares of special interests.

Now Congress has gone a big step further away from Constitutionality by creating a Bureau that gets its funding from the Fed rather than from Congress. The original purpose of the Fed was to control the country’s money, to set the reserve requirements of banks, and to be a lender of last resort for the banks. Now the Fed has a consumer bureau that draws funds from its interest income. What is next? The pride of America has been its Constitution, but it is being replaced by two words, “Anything Goes.”

Consumers do need protection from fraud, but if the federal government is to do it, be honest and create an agency within the Department of Commerce that gets its funds from the Treasury. Good government makes the explicit appearance coincide with the economic reality, and that is the opposite of what Congress has done with the Crafty Poobah.


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