CONSUMER FINANCIAL PROTECTION IS A RECOVERY ISSUE, TOO.

Simon Johnson makes a good point about the administration's proposed agency to protect consumers from unsafe financial products. Basically, he says, this is a smart way to improve consumer confidence:

Many consumers were burned, one way or another, by a financial product in recent years. They are now suspicious. They can spend time looking for vanilla alternatives from reputable companies, but, frankly, everything is to some extent tainted.

What happens when there is a scare regarding food contamination in the United States or globally? People buy less of that food until the government assures them that: 1) we now understand the cause of the problem; and 2) it will not happen again.

Word has gotten around that many financial products are not safe — as well as the idea that the debt levels encouraged by the finance industry are not always healthy. Consumers are going to be more careful and, if there is no way to reassure them fully, they may be excessively careful.

True that. Johnson also notes that the Consumer Financial Protection Agency would also be good for the health of the broader financial system -- it seems strange that the financial sector, in fighting the CFPA, is lobbying in favor of the terrible loan underwriting standards that led to all the toxic assets on their books. But it also seemed strange that they could wring billions of dollars out of sub-prime borrowers with insane combinations of exotic financial products, so I suppose that's pretty par for the course.

Meanwhile, if you want to read a commentary on CFPA by a smart person who has no clue whatsoever how the consumer credit system works in real life, Richard Posner has just the sort of abstract, Ivory Tower analysis that you're looking for.

-- Tim Fernholz