The Dodd-Frank Act in general, and in particular its favorite child, the Consumer Financial Protection Bureau, represent sharp political disputes, as now with bypassing the Senate by the "recess" appointment of its director.

But more fundamentally, they represent clashing political philosophies.

Dodd-Frank is best described as the "Faith in Bureaucracy Act." Given everything we know about human nature, we should not have such an expansive faith in anything human, especially bureaucracies. But the school of political philosophy represented by this act persistently does.

A big expansion of bureaucracy is the political result of each financial crisis. We are promised each time that the new bureaucracy will assure that "never again" will we have a crisis. But of course, after a while, we have the next crisis anyway. Moreover, it turns out that the regulatory reaction in the wake of the crisis is usually a procyclical clampdown, which makes it harder to escape from the bust, just as is now the case.

Each time there is a crisis, politicians must Do Something. But what is there that they can really do? Well, they can always set up new regulatory agencies and committees. The 2007-09 financial crisis giving rise to the Dodd-Frank Act is a typical example of this process.

The CFPB, however, is an extreme example of faith in bureaucracy, because it is consciously designed, with careful forethought, to be completely "independent"—that is, freed from democratic checks and balances.

Indeed, the daring and successful political tactic of calling it a "bureau" of the Federal Reserve entirely freed the CFPB from that most basic democratic control, the power of the purse. The CFPB dips directly without having to ask anybody into the taxpayers’ money--the elected representatives of the people have no say in the matter.

The Federal Reserve's profits after dividends are simply and totally the taxpayers' money: they always have and always should be headed straight to the Treasury's general account. Funding the CFPB by tapping the Fed's profits was an obvious, but successful, transfer of money from the taxpayers without normal Congressional appropriations, and moreover removed the ability of future Congresses to control the new expansive bureaucracy by the purse.

By July, 2010, the party of Senator Dodd and Congressman Frank could see that they were going to suffer large losses in the next election, as of course they did. The permanent funding device of the CFPB, passed while they still had large majorities, made sure that the will of the people expressed in elections, for example the election of 2010, could not take away from their legislative offspring the funding being taken from the people .

Setting up a bureaucracy free of any checks and balances is based on a Platonic, that is, an anti-democratic, idea. It rests on the assertion of the superior knowledge and superior virtue of the employees of the bureaucracy.

The opposite philosophical position — that of believers in democracy as opposed to believers in Plato — sees no evidence of such superior knowledge, especially when it comes to economics and finance, or of such superior virtue in government employees or anybody else. Instead, it observes that all men are sinners, all have fallen short, all make big mistakes (especially when it comes to predicting the future), and all are corrupted by the hunger for and exercise of power.

Therefore, in a democracy, no one—not a single individual or collective body &mdash ;should be "independent." All should be subject to checks and balances — just as designed by the American Founding Fathers.

In my judgment, the required checks and balances for the CFPB include:

  • Appropriations by Congress in the normal, democratic fashion;
  • Having the political agenda of the CFPB balanced by safety and soundness considerations;
  • And having its rules subject to explicit cost-benefit analysis.

Speaking of philosophy, this is my Hegelian conclusion:
Thesis: Backers of creating independent bureaucratic powers like the CFPB are prone to worry about so-called "unfettered markets."

Antithesis: Advocates of democracy must worry even more about the unfettered State, and in particular, unfettered bureaucracies.

Synthesis: Everybody should be subject to checks and balances. This obviously includes the CFPB.

 Alex J. Pollock is a resident fellow at the American Enterprise Institute, Washington DC. He was President and CEO of the Federal Home Loan Bank of Chicago, 1991-2004.