Too important to fail: predatory lending still poses a systemic risk to the economy. Will Obama's new consumer financial protection bureau succeed in taming it, or will the agency be strangled in its crib?

• Author: Gravois, John
• Position: THE FUTURE OF SUCCESS

If you want a hint as to where the battle of the 2012 general election might go, you could do worse than to look at where it started. On the morning of January 4, 2012, in his first official act of the campaign year, President Barack Obama mounted a podium in a packed high school gym outside Cleveland and rolled out an announcement. Blowing past months of GOP filibustering, he declared his recess appointment of Richard Cordray, a mild-mannered former Ohio attorney general, to serve as the first head of the Consumer Financial Protection Bureau, a powerful new regulatory agency created by the Dodd-Frank law. Back in Washington, GOP leaders, who had held Congress open in a pro-forma session during the Christmas break precisely to block such a recess appointment, went into fits of televised dudgeon, calling the move "arrogant," "unconstitutional," and--this from Mitt Romney himself--"Chicago-style politics at its worst."

The consumer bureau has provoked virulent opposition from Republicans ever since it emerged as the brainchild of Elizabeth Warren, the Harvard law professor turned progressive folk hero who is now running for Ted Kennedy's old Senate seat in Massachusetts. Though the GOP couldn't stop the creation of the CFPB, it did manage to put enough pressure on Obama to make him shrink from nominating Warren to serve at its head, a decision for which he was promptly vilified by liberals. Then, when Obama nominated Cordray, Republicans held the appointment hostage, demanding structural changes to the bureau that would have made it more accountable to congressional committees and the industries that comfortably influence them. Most recently, in May, Glenn Hubbard, a top economic adviser to the Romney campaign, suggested to the Wall Street Journal that defanging the bureau would be a central agenda item in Romney's economic strategy.

This GOP fury might seem strange, even self-destructive, from afar. After all, the prime mission of the CFPB, which is still just barely up and running, is to crack down on predatory lending--a range of practices epitomized by the sale of the exploding subprime mortgages that hollowed out much of the wealth of America's middle class and precipitated the Great Recession. Polls show that, though few Americans are yet aware of the CFPB, an overwhelming majority support it once they learn about its mission of protecting consumers from big financial institutions.

Nevertheless, the now-bailed-out financial sector claims that if a strong regulator scrutinizes the safety of its products--as the federal government does with toys, cars, appliances, airlines, food, drugs, and most everything else that's for sale in our capitalist economy--it will tank the industry. And so it has gone to war.

Obama's rather nervy decision to begin 2012 by appointing Cordray suggests that he is prepared to make the CFPB an issue in the campaign--as well he should. We might as well just say it: saving the CFPB is essential to fixing the fundamentals of our economy and even restoring the American Dream. Americans need a strong financial sector, but not, as we now know from painful experience, one that profits by methodically stripping its customers of their assets. Predatory lending has become endemic to the business model of American finance, and until that changes, it's hard to see how the economy can once again provide broad prosperity. Not even the financial services industry itself will prosper in the long run unless it adopts a business model that helps build, rather than erode, the wealth of average Americans. The question is whether the bureau can survive the Republican onslaught, and, if so, whether this "twenty-first-century agency" will be powerful enough to change the way our consumer finance market behaves.

The origins of the CFPB trace back, as many things do, to a conversion experience. In the early 1980s, Elizabeth Warren was a young conservative law professor in Texas who had set out to study why families filed for bankruptcy. The laws governing bankruptcy had recently been liberalized, and Warren had a dim view of the likely consequences. "I was going to expose these people who were taking advantage of the rest of us," she recalled in a 2007 interview. "I set out to prove they were all a bunch of cheaters." But her data came back telling a vastly different story.

American families weren't going broke from shopping sprees at the mall, Warren found. They were going broke because their incomes were stagnating while their fixed costs--health care, housing, car payments--continued to rise. The struggle for these necessities was driving families to rely on a set of financial products that were increasingly mystifying to them and profitable for issuers: credit cards, home equity loans, payday loans, and the like. Once a family's assets were depleted, bankruptcy was often just an illness, a job loss, or an exploding interest rate away.

The way Warren tells the story, she first had the idea for the consumer bureau years later, in 2007, at a time when she was having a lot of meetings with credit card executives. She was trying to sell them on the idea of offering what she called a "dean card"--a credit card that listed all its costs, its fees, and its true, long-run interest rate up front. (That is: instead of selling a card with, say, a 4.9 percent teaser rate and then jacking it up to 18.9 percent after some months, companies would just market a card with a straightforward 7.9 percent rate.) The card would then be granted a kind of Good Housekeeping seal of approval.

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But the credit card executives all took a pass. At one meeting, an executive confided in Warren. "If we had to tell people what these things cost while our competitors play the same old games, no one would use our product," he told her, as she recalled in a speech in 2011. There was no advantage for anyone in the business to be the first mover, she realized; the government had to get involved and set rules across the entire market. It was around that time, she says, that she began sketching out the idea for what would become the CFPB.

Warren's wasn't the only conversion experience that ultimately led to the CFPB. In the mid-2000s, Richard Cordray was serving as the treasurer of Franklin County, Ohio. An Oxford- and Chicago-educated lawyer with several arguments before the U.S. Supreme Court under his belt, Cordray had made a failed, quixotic bid for the U.S. Senate in 2000 before adjusting his sights on local office. His campaign in Franklin County had rested largely on a promise to aggressively collect delinquent property taxes. Much like Warren, he expected to take on the shirkers who were taking advantage of the rest of us. But what he found was something else.

"There were deadbeats," he grants. But a huge number of delinquent Ohioans were ordinary middle-class folk who had simply hit road bumps--medical problems, divorce, a death in the family, job loss--but had no shock absorbers, no savings, to help them bounce back. And so they had stopped paying their mortgages and, with them, their property tax bills. Cordray's office also began to detect that a larger story was playing out: Ohio, it turned out, had been one of the first hotspots of subprime lending, and, by the mid2000s, evidence of rampant speculation and mass delinquency was surfacing fast. "We began to see the irregularities that eventually became known as the foreclosure crisis," Cordray recalls.

While essentially serving as a...