As the winner of the Nobel Prize in Economics and a longtime economics professor at Princeton, there is little doubt Paul Krugman knows more about financial services than most.

Which makes it all the more unfortunate that his recent op-ed arguing against passage of financial reform is so, well, uninformed.

Krugman’s basic point is that reform without a strong independent agency dedicated to consumer protection is no reform at all, and not worth passing.

“It’s time to draw a line in the sand,” Krugman writes. “No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.”

Whether you agree with creating a consumer financial protection agency or not – and I’m not taking a stand either way – the argument laid out here is facile.

For one, Krugman makes it all or nothing: either a new agency is born or there is no hope of beefing up consumer protections. In doing so, he rejects several possible compromises still being debated on Capitol Hill, including creating a new consumer division within an existing bank regulator, like the Federal Reserve Board or Treasury.

His reasoning is that given recent appointments to both bodies, consumer protection would have been ignored during previous administrations.

“The only way consumers will be protected under future antiregulation administrations… is if there’s an agency whose whole reason for being is to police bank abuses,” he wrote.

This sounds great on paper – I just don’t think Krugman has thought it through. The fact is that administrations always appoint the heads of independent agencies, usually shortly after they take office. If they want to downplay an agency – even one dedicated to a goal like consumer protection – they can, and will, do so.

Just look at the Environmental Protection Agency. Under Republican administrations, liberals often accuse the agency, which is dedicated to protecting the environment, of doing the exact opposite. There is little question that liberals would make the same claim of a CFPA if its leader were appointed by a Republican.  

There is no structure that you can create that gets around this problem. A consumer division within the Fed run by a presidential appointee could be sidelined by an administration just as easily as a consumer protection agency chief could be.

Worse is Krugman’s argument that nothing at all is preferable to a reform bill that does not pass his purity test with regard to consumer protection.

This throws out all the other pieces of reform, including provisions to give the government more power to oversee, seize and unwind large institutions, boost their capital reserves and regulate derivatives contracts.

I’m not saying consumer protection isn’t important. But assuming there is only one way to do it – as Krugman does – is a mistake. And letting the reform effort hinge on that litmus test would be an even bigger one.

At best, the passage of financial reform will prevent the next crisis before it happens. At worst, it will give regulators a better shot at doing so.

A failure to act, however, would only guarantee that the next time a crisis is on the horizon, even if we have the wisdom to see it, we may not have the power or the resources to prevent it.

 Rob Blackwell is the American Banker's Washington Bureau Chief