Friday, March 6, 2009

Federalism and America's financial crisis

Lawrence Wasden is the Idaho attorney general.


Recently, I joined the attorneys general of all the states in asking President Obama to re-examine actions by a federal agency permanently blocking states from enforcing their consumer protection laws with regard to certain financial institutions. I am also joining a brief asking the U.S. Supreme Court to hear a case that permitted this agency to block state enforcement.

The Office of the Comptroller of the Currency (OCC) is the federal agency responsible for oversight of national banks. The OCC's unprecedented seizure of regulatory authority prudently exercised by the states has contributed to the current financial crisis in our nation.

Prior to the OCC's action, parallel state and federal banking systems co-existed in the United States. This system, commonly referred to as the "dual banking system," has benefited our country for nearly 200 years.

More than five years ago, attorneys general warned the OCC of the problems of subprime loans. The OCC not only dismissed these warnings, it went further by blocking state oversight of some of the financial entities that contributed to the economic crisis. In the process, constitutional principles of federalism—the idea that the power to govern is shared between national and state governments—were discarded and cast aside. The result has been detrimental to all of us.

Federalism is not a new idea. It is as old as our republic. President Thomas Jefferson, in his inaugural address, emphasized that "the most competent administrations for our domestic concerns" are state governments. In 1932, in a famous Supreme Court opinion, Justice Louis Brandeis noted the power of federalism and that states serve as valuable testing grounds where the people can apply social and economic policies to address individual concerns.

The OCC rejects this wisdom and experience.

Through the years, state legislatures have enacted comprehensive consumer protection and banking laws to protect consumers from deceptive and predatory lenders, to ensure responsible mortgage lending, and to help preserve a stable financial market. The OCC decided to preempt these laws as they applied to national banks and all of their subsidiaries. Despite the states' warnings, the OCC pursued its preemption agenda and expanded its jurisdictional reach to levels never before seen in our country. With preemption accomplished, the OCC is the one entity left to protect consumers from national banking improprieties.

Unfortunately, the OCC has not been up to the task. Between 2000 and 2006, the OCC took only one enforcement action related to subprime lending, claiming that it had no evidence that "national banks are engaged in predatory and abusive lending practices to any discernable degree." The states' warnings to the OCC were discarded and ignored.

Today, we are suffering the consequences of the OCC's inaction in bank oversight and its decision to exclude states from enforcing their own laws. National banks, because of their subprime exposure, report losses of $100 billion. More importantly, the present mortgage implosion has resulted in thousands of delinquencies and home foreclosures.

The point of this commentary is to remind us all, particularly our policymakers, of the benefits of government power rooted in federalism. For several years, I have been raising this issue to the federal courts and writing letters to Congress and federal agencies. I plan to keep pressing for Idaho's rights as a sovereign state. Federalism is too important to abandon.

In the end, no matter how much is done to repair the present financial damage, history will repeat itself if states are shunted to the sidelines and citizens are left to rely solely upon a federal agency for protection. Idaho has a historical interest and solid track record in protecting consumers and businesses from abusive practices in the marketplace. I invite the federal government to allow our state to use that expertise and skill once more to protect our citizens.

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