One major challenge effectively regulating financial institutions is the federal preemption of state laws. For example, if there are federal rules about what kind of loans a bank can make and an individual state wants to make tougher regulations to prevent stuff like predatory lending, well, too bad, no dice, the federal rules preempt the state statutes, rendering them inoperable. I touched on some of these issues in my article yesterday about Massachusetts Attorney General Martha Coakley, who had to be pretty creative in order to find a legal basis to hold predatory lenders accountable, partially because of federal preemption rules.
Preemption doctrine often serves business interests at the expense of taxpayers -- it's much easier for them to lobby for lax regulations at the federal level rather than in all fifty states -- and also should offend lovers of local democracy -- why should the feds limit your ability to make rules? Sometimes, of course, federal preemption is useful, but in many cases you want to federal rules to be a floor and not a ceiling. That way, there's a clear national standard and states can choose to go further if they want, but they can't offer less protection to consumers than any other state.
Some exciting news in this direction, however, is that yesterday President Obama issued an executive memorandum [PDF] requiring the heads of departments and agencies to not overreach their authority for preemption while making new regulations (in some cases during the Bush administration, preemption was used with only vague statutory backing) and to initiate a review of the last ten years of regulations to determine if preemption was misused and correct any overreaches they find. The memo notes that...
Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values. As Justice Brandeis explained more than 70 years ago, "[i]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."
-- Tim Fernholz
Photo courtesty Flickr user Steve Rhodes.