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Diego Zuluaga

Articles by Diego Zuluaga

To Help the Unbanked, Break the Industrial Bank Taboo

June 9, 2020

According to the FDIC, 8.4 million U.S. households lacked a bank account as of 2017, putting America behind other rich countries. Minorities and the young are heavily overrepresented among the unbanked, so addressing this problem is a matter of both financial inclusion and equal opportunity. Fortunately, the FDIC can use its authority over an obscure banking charter to help, and it recently proposed to do just that. But if it goes ahead, it can expect stiff opposition from industry incumbents and their champions in Congress.

Many blame the unbanked problem on the recent decline in the number of U.S. banks. But that decline has been more than offset by the 24 percent growth of bank branch networks since 1995. Because the share of unbanked households is also often higher in urban areas,

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Fannie and Freddie Need Fixing—Urgently: A Response to Joe Nocera

December 10, 2019

Yesterday, Joe Nocera penned an extraordinary column expressing his bafflement at the Trump administration’s drive to release Fannie Mae and Freddie Mac, two firms that purchase and guarantee around half of single-family mortgages in the United States, from government conservatorship. Nocera argues against such a move, writing that “if it ain’t broke, don’t fix it . . . Fannie Mae and Freddie Mac ain’t broke.”
The piece is disconcerting from start to finish. Nocera writes that Fannie and Freddie make the 30-year fixed-rate mortgage, a product common only in the U.S., possible and thereby “help more people attain the American dream of homeownership.” Nocera neglects to mention that the U.S. homeownership rate, at 64 percent, is the same as it was in the late 1960s, long before mortgage

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Why There Has Been No Great Reversal in U.S. Banking

December 10, 2019

Thomas Philippon’s The Great Reversal is an important book in which he warns of the decline of competition in many U.S. product markets. Not having studied antitrust issues for some time, I will leave criticism of his general thesis—that competition has indeed declined and that this is owing to lax antitrust enforcement—to my Cato colleagues writing about that issue. (You can start here.)
But I do want to take issue with Philippon’s argument that finance is one of the industries in which competition has declined. Philippon devotes a whole chapter of the book to the financial services industry, giving it the punchy title, “Why Are Bankers Paid So Much?,” while Martin Wolf, in his Financial Times review of the book, called finance a “rent-extraction machine.”
There are two serious problems

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Financial Inclusion without Finance? The Misguided Quest to Limit Choice in Consumer Credit

October 24, 2019

On October 21, I had the pleasure to give the research keynote address at the annual conference of the Financial Services Centers of America (FiSCA) in Miami. The below is a transcript of my speech, in which I critiqued some policymakers’ attempts to promote financial inclusion by restricting consumer choice and giving the government a larger role in credit allocation. In light of historical experience in the U.S. and elsewhere, I offered market competition as a more effective policy to ensure all Americans can achieve financial security.
The legislator, who knows nothing, nor can know any thing, of any one of [the borrower’s] circumstances, who knows nothing at all about the matter, comes and says to him—"It signifies nothing; you shall not have the money: for it would be doing you

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Bruno Le Maire’s Coup de Brumaire

October 17, 2019

The French finance minister, Bruno Le Maire, delivered a scathing rebuke to Libra, the Facebook-led digital currency initiative, in the Financial Times this morning. Coming on the heels of several U.S. companies’ withdrawal from the initiative after they received threatening letters from Senators Sherrod Brown and Brian Schatz, Le Maire’s is probably the most forceful attack on the Libra project to date by a high-ranking global policymaker.
The Frenchman does not mince words. He calls Libra "unacceptable," its proposed governance "unconscionable," and he rejects "a regulatory response" — hinting that governments should just not allow Libra to launch. Le Maire concludes by stating that financial innovation must "respect the sovereignty of states."
In fact, a careful reading of his op-ed

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More Than Patching Up: What the CFPB Should Do with Mortgage Underwriting Standards

September 27, 2019

Last week was a significant one for housing finance policy, as the Consumer Financial Protection Bureau gathered input on how to reform the underwriting rules that mortgage lenders must follow. With $15 trillion of mortgage debt outstanding, this is a subject of great economic significance for the U.S. economy. Unsurprisingly given the high stakes, it is also a contentious subject on which some of the largest trade and activist groups in Washington — from banks and Realtors to community groups and public-interest lawyers — have weighed. I too submitted a comment letter on behalf of the Cato Institute.
The auspicious news is that the CFPB has announced the expiration of a damaging loophole that has increased risk in mortgage finance. In her decision, CFPB Director Kathy Kraninger enjoyed

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Was the Housing Bailout Good Business for the Taxpayer?

September 19, 2019

Earlier this month, the Department of the Treasury released its long-awaited housing finance reform plan, which focused mainly on the two government-sponsored enterprises, Fannie Mae and Freddie Mac. The feds took both GSEs over in 2008, when rising defaults jeopardized their viability. The blueprint’s release date was propitious, eleven years almost to the date after the controversial bailout.
But was the controversy justified? As the GSEs’ long-overdue exit from government “conservatorship” becomes a more realistic possibility, some market participants with a vested interest are telling us that Uncle Sam actually made money by rescuing the mortgage giants – to the tune of $110 billion. Since putting taxpayer resources into failing firms is such good business, perhaps we should stop

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Progressives’ Financial Inclusion Agenda Is Likely to Backfire

August 14, 2019

In a recent op-ed for CNN, Rep. Rashida Tlaib (D-MI) suggests a plan for improving the financial inclusion of minority households. She believes that reversing the Trump administration’s recent regulatory initiatives on credit discrimination and mortgage reporting legislation would improve matters.
While Rep. Tlaib is right to point out the disproportionate numbers of blacks among those lacking access to financial services, their financial exclusion goes back, not years or months, but decades. Moreover, her recommendations would mainly double down on existing regulations that seem to perpetuate rather than mitigate financial exclusion.
Rep. Tlaib begins with the striking finding that, ostensibly, the black homeownership rate in the second quarter of 2019 was lower than at any time

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Of Libras and Zebras: What Are the True Financial Risks of the Facebook-Led Digital Currency? (Part III: National Security Risk)

July 17, 2019

At yesterday’s Senate Banking Committee hearing on Libra, the digital currency project led by Facebook with 27 other partners, concerns about its potential to undermine U.S. national security featured prominently. Senators from across the political spectrum, including Arkansas’ Tom Cotton and New Jersey’s Bob Menendez, suggested that Libra might lend itself to the scheming of malicious actors and U.S. strategic foes, a worry expressed the day before by Treasury Secretary Mnuchin.
How vulnerable will Libra be to criminal uses? A careful examination of the digital currency’s mechanics and its likely employment by financial services providers, suggests that policymakers have reacted prematurely. In fact, cryptocurrencies are significantly less useful to criminals than cash, because they

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Of Libras and Zebras: What Are the True Financial Risks of the Facebook-Led Digital Currency? (Part II: Monopoly Risk)

July 16, 2019

Policymakers, in America and around the world, have for the most part responded to the announcement of Libra with skepticism, fear, and not a little bit of loathing. In my last post, I argued that Libra’s association with Facebook and misleading references to it as a cryptocurrency led to an overreaction on the part of the policy elite. Like budding zoologists who think of zebras rather than horses when they hear hoofbeats, government officials are focusing on the memorable (crisis, monopoly, fraud) rather than the probable (an improved payments system) consequences of this innovation.
My previous post showed that warnings about the systemic risk that Libra presents are overblown. In this post, I explore another concern policymakers have expressed about the Facebook-led digital

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Of Libras and Zebras: What Are the True Financial Risks of the Facebook-Led Digital Currency? (Part I: Systemic Risk)

July 11, 2019

In medicine, “zebra” describes an instance when the doctor diagnoses an unlikely but eye-catching condition instead of a less noteworthy but more probable one that also fits the symptoms. Professor Theodore Woodward of Maryland University coined the expression when he admonished his students “When you hear hoofbeats, think of horses not zebras.”
As the zebra phenomenon illustrates, even experts tend to judge more memorable events as more likely – a bias known as availability – and to remember unusual events more clearly than more mundane ones. Uncorrected, such predispositions can lead to bad prescriptions, whether in medicine or further afield.
Woodward’s rule-of-thumb came to mind as policymakers around the world reacted to the announcement of Libra, the Facebook-led digital

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The True Winners and Losers of Financial Regulation: Remarks at the New York League of Independent Bankers

April 25, 2019

Earlier this month, I had the pleasure of delivering some remarks to the New York League of Independent Bankers. I spoke about how and why financial regulation often has consequences that are very different from the ones that policymakers intend. What follows are my written remarks — I hope you enjoy reading them.
Finding myself in New York before a group of community bankers, I cannot help but think of George Bailey, the lead character in the 1946 movie It’s A Wonderful Life.
Bailey is of course the manager of Bailey Bros.’ Building and Loan, the local bank in Bedford Falls, New York. He’s also the very picture of the upstanding community banker: generous, altruistic, and always ready to sacrifice himself for his family and neighbors. When Bailey falls on hard times and is

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A Positive Policy Agenda for CFPB Director Kathy Kraninger

April 16, 2019

The Consumer Financial Protection Bureau has been controversial since its creation. As an executive agency enjoying Federal Reserve funding independent of the Congressional appropriations process—and run by a single director removable only for cause—the Bureau is unusual and possibly unconstitutional. In its first years of existence, the CFPB gained a reputation for its exceptional activism and anti-industry agenda. Curiously, many of its enforcement and rulemaking activities focused on areas that were explicitly outside of its regulatory remit—such as auto lending, federal student loans, and credit providers historically regulated at the state level, such as payday lenders.
When Mick Mulvaney replaced Richard Cordray as CFPB Director, he vowed to stop “pushing the envelope” in its

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A War on Crime or on Business?

March 21, 2019

Since the Bank Secrecy Act (BSA) came into force in 1970, banks and other financial institutions have been subject to extensive reporting requirements on the transactions they perform on customers’ behalf. In subsequent years, notably after 9/11 with passage of the USA PATRIOT Act, Congress has expanded the range of firms subject to these rules and the information that they must collect. In the nearly half-century since the BSA’s passage, so-called anti-money laundering/ know your customer (AML/ KYC) reporting duties have also expanded fortuitously, as the dollar thresholds – typically, $5,000 or $10,000 – for reporting transactions have not been adjusted with inflation.
Law enforcement agencies have encouraged this expansion, warning that, without copious access to transaction

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Why Bans Will Not Encourage “Responsible Innovation”

February 25, 2019

Two recent announcements by the Consumer Financial Protection Bureau have proponents of increased financial regulation up in arms.
The first is the Bureau’s expansion of its no-action letter policy to include a regulatory sandbox. A sandbox is a program which allows firms to offer new products under a modified regulatory regime and with oversight from financial regulators. No-action letters, for their part, are assurances from a regulator that it will not take adverse actions in response to a specific new practice by a regulated firm. Neither policy heralds the advent of a regulatory Wild West.
The second announcement involved changes to the CFPB’s payday lending rule, which in its original form (published in 2017) would have made most high-cost short-term lending of this kind

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Why Bitcoin Is Not an Environmental Catastrophe

September 4, 2018

The environmental impact of cryptocurrencies looms large among the many concerns voiced by sceptics. Earlier this year, Agustín Carstens, who runs the influential Bank for International Settlements, called Bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Carstens’ first two indictments have been challenged. Contrary to his assertion, while the true market potential of Bitcoin, Ethereum and other such decentralized networks remains uncertain, by now it is clear to most people that they are more than mere instruments for short-term speculation and the fleecing of unwitting buyers.
That Bitcoin damages the environment without countervailing benefits is, on the other hand, an allegation still widely believed even by many cryptocurrency fans. Sustaining it

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The Treasury’s Fintech Report: Key Takeaways

August 1, 2018

Today was a busy day for financial regulatory policy. In the morning, the Department of the Treasury released its long-awaited report on nonbank financials, fintech, and innovation. A few hours later, the Office of the Comptroller of the Currency announced that it will start taking applications for a special purpose charter for “fintech companies engaged in the business of banking.”
Over the eighteen months since President Trump signed an executive order outlining the core principles for financial regulation under his watch, the fintech sector has been gripped by policy uncertainty and the looming threat of regulation by enforcement. Today’s events bring much-needed clarity on the Trump administration’s outlook for financial innovation, and the likely way forward.
At 222 pages, the

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Don’t Blame American Express for the Plight of the Poor

June 27, 2018

Yesterday, the Supreme Court ruled that credit card provider American Express’ long-standing policy of including anti-“steering” clauses in its contracts with merchants was not anti-competitive.
Steering is the practice whereby merchants discourage customers from paying with comparably high-cost cards like Amex and to use Visa or Mastercard instead. Importantly, anti-steering agreements do not limit merchants’ ability to favor debit cards or cash in their dealings with customers. The majority opinion, drafted by Justice Clarence Thomas, argues that there was no evidence of consumer harm in the form of higher prices or reduced output as a result of Amex’ anti-steering requirements.
The Court notes that the credit-card market is a market for transaction services and is two-sided,

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Should Cryptocurrencies Be Regulated like Securities?

June 25, 2018

Should cryptocurrencies be regulated like securities? Financial regulators have been pondering this question for some time. In a Briefing Paper published today by the Cato Institute’s Center for Monetary and Financial Alternatives, I suggest that securities regulation would only seem warranted in certain clearly circumscribed cases. For the most part, cryptocurrencies should be treated like commodities.
It has been nearly a decade since “Satoshi Nakamoto” laid the intellectual foundations for Bitcoin, the first cryptocurrency platform. Since then, more than 1,600 peer-to-peer networks have emerged to disrupt established intermediaries. Cryptocurrencies, even in the comparably bearish first half of 2018, have an aggregate market capitalization of nearly $300 billion.

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Finally, Welcome Relief from the Unnecessary Burdens of Dodd-Frank

May 9, 2018

Congress looks set to pass long-awaited changes to the Dodd-Frank Act that would relieve small and medium-sized banks from some of the onerous burdens of the post-crisis financial legislation package, the Hill reports:
The Senate in March passed a bipartisan bill to exempt dozens of banks from the stricter Federal Reserve oversight under Dodd-Frank and scores more from lending restrictions and reporting requirements. The deal, sponsored by Senate Banking Committee Chairman Mike Crapo (R-Idaho), passed by a 67-31 vote with support from more than a dozen Democrats.
A deal between the House and Senate would clear the way for Congress to pass the biggest changes to the Dodd-Frank financial rules since the law was enacted in 2010. The House and Senate have squabbled over the Senate bill,

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Venezuela’s Petro: Fool’s Oil

March 29, 2018

Venezuela has the largest oil reserves in the world. Crude exports earn the country 95 per cent of its foreign exchange. That figure used to be lower, but relentless nationalization and the government’s insistence on controlling prices and exchange rates have made other exports unviable. Not that productive activity has reoriented inward: the IMF expects Venezuelan GDP to have dropped by 15 per cent in real terms each year in 2016 and 2017, and to do so again in 2018. This is a country in freefall.
Nor have price controls helped to sustain Venezuela’s currency. The bolivar, dubbed with cruel irony ‘strong’ because it replaced the old, weaker, bolivar at a 1:1,000 rate, has itself lost 99.9 per cent of its value against the U.S. dollar since March 2016. Shortages induced by controls,

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Invalid When Made: The District Court’s Madden v. Midland Decision

March 20, 2018

The seven-year saga of Madden v. Midland began as a dispute over a four-figure consumer debt. But billions of dollars’ worth of loans, and the future of consumer lending markets, now hang in the balance.
Madden began in 2011 as a lawsuit based on a claim of usury. The plaintiff, Saliha Madden, a New York resident who had defaulted on $5,000 worth of credit card loans. The balance owed was later acquired by Midland Funding, a debt collector headquartered in California. Midland attempted to collect the debt with a default interest rate of 27 percent. Although the loan contract stipulated that it would be governed by Delaware law, which does not have a usury cap, Madden sued Midland, alleging unfair debt collection practices under federal law and usury under New York law — which

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