A major part of the Dodd-Frank bill that Mr. Obama and the Democratic congress of 2009-2010 was the creation of an agency to protect consumers, the Consumer Financial Protection Bureau (CFPB).  Dodd-Frank was troubling enough; I’ll not delve too deeply into that murky mess other than to note the irony of the financial reform bill having the names of Barney “I’ll not allow any reform of Fannie/Freddie” Frank and Chris “Sweetheart countrywide loan deal” Dodd, two of the principle instruments of the corporate and Washington cronyism that helped us get to the crisis.

The CFPB is an amazing creation, in that it is not accountable to anyone–by design.  To ensure the Republicans would not be able to hold it in check should they ever regain power, the Democrats made this an agency that does not need funding or regulatory oversight by Congress–its funding comes through the Federal Reserve.  But it doesn’t answer to the Fed either.  The mischief this unaccountable agency can do is only beginning, as the nascent agency is just getting its “sea legs.”

In today’s headlines, the CFPB is issuing new regulations to let you join a class action lawsuit if you have a high bank fee.  The ostensible necessity for such an action is:

Richard Cordray, director of the CFPB, told CNBC’s “Closing Bell”that arbitration clauses are hidden within the fine print, in which “consumers are forced to act alone.”  Most consumers “don’t realize that in that contract may be buried an arbitration clause, which dictates how any dispute would be handled,” he said in an interview.  “For example, if they’re overcharged $50, this would not allow them to go to court. They couldn’t join with other groups of consumers who have been similarly overcharged to get justice,” Cordray explained.

Really?  We need to join a class action lawsuit, increasing the (already high) litigiousness of our country, so we can avoid high fees? Doesn’t the market already provide other safety features, like competition?  Why not just go to another bank?  Why is banking treated any different than any other service?  Should I join a class action lawsuit if I don’t like the price I end up paying for a lab fee for my doctors appointment?  It was buried in the fine print!  Actually no, there is no print in health care–you have no idea what you are going to pay, but that is another blog post!  I don’t like the fact that when I shop in some stores I’m forced to pay for the paper bags, so I’ll just join a class action lawsuit?!

Every service or good that we purchase has costs and benefits, if on net it is not beneficial we should not buy it at all.  If we don’t like one aspect of the cost, go find another provider.  The problem, of course, is that there will be unintended consequences of these actions.  The first and obvious is that most class action lawsuits of this type provide almost no financial benefit to those ostensibly harmed, although it may give them a faint hint of “justice.”  This is especially true in the small harms to many customers rationale, as expressed here:

Account holders “who are very often harmed on a massive scale for small amounts are not able to pursue group claims…[are] going to be denied justice altogether. Our study found that very few consumers would ever bother to pursue a $50 fee or $100 overcharge by taking it to court,” Cordray said.

But it does provide large rewards to trial lawyers, who–gasp, shock, surprise!–give the vast majority of their campaign donations to Democrats.

The second problem is that financial services is a competitive market already.  This suggests that when the firms have an increasing legal cost in this dimension, they will have to either increase costs in another area, or reduce the quality of their services.  Its not clear at all that the tradeoff will benefit consumers.  What is clear is that the consumer will not be allowed to shop for the margins which they are concerned about.  The unaccountable bureaucrats at the CFPB have seen to that.*

As Henry Hazlitt told us so long ago in Economics in One Lesson, it is the mark of the good economist to see not just the short term effects, but also the long term effects of an action.

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.

The long term consequences of this action will be to harm precisely those we ostensibly care so much about (consumers), while helping those who precisely don’t need our help (trial lawyers, bureaucrats and politicians).   But at least we stuck it to big banks!  Now I feel so much better!

*As an aside, the unaccountable nature of the CFPB is troubling far beyond your friendly neighborhood Bereans.  The courts are currently examining whether its structure violates the separation of powers.