David Skeel lines up the pros and cons:
Reasons to pick Warren: 1) the liberal base: liberals will be outraged if the President picks someone else, which could further deflate the enthusiasm of his base, boding ill for the November elections; 2) She’s a true consumer advocate: if he cares at all about the new agency, it will be hard to pick anyone else; 3) when push comes to shove, it won’t be easy for Democratic senators to vote “no” on someone who has defined herself as a protector of middle class Americans. (Republicans won’t be the issue. My guess is that the three who voted for the financial reforms are possible yes’s, and the others will all be no’s.)
Reasons to pick someone else: 1) picking Warren could destroy the President’s relationship with the financial services industry (a relationship that is a lot better than people tend to think); this might not matter in November, but it could be a big problem as he raises money for 2012; 2) a vote for Warren would be a very difficult vote for moderate Democrats like Ben Nelson, who’ve already taken some tough votes this year; as a result, confirmability is a genuine issue; 3) Effect on markets and lending: Warren’s signature concerns, such as clamping down on further on credit card and mortgage loans, could scare the markets and prompt banks to further tighten their lending to consumers and small businesses.
David concludes that Warren will be nominated.
Meanwhile, David Zarig asks why Obama would "want someone relentlessly critical of the administration's economic policy, who goes to the media at the drop of a hat, in a position where she would be tough to fire?" And continues:
To say nothing of Megan McArdle's pointed observations about the relationship between evidence and argument in the ouevre? I think she was wrong about whether the administration was misusing the TARP money, too - they're going to get most of it back, except on the piece she supported, which was mortgage mod.
The only way Washington politicians would hire someone to an economic post who isn't a team player and doesn't support their economic agenda is if they were absolutely forced to do so, which maybe they will be, given that I presume the unions are strongly behind her. Still, it's not an elected office, it's an appointed one, and the Obama administration must like drama much more than previously understood, because that's what they would be getting with Warren. She was a great secured transactions teacher - I can personally attest to that - and very, very smart. By my lights, she probably deserves a job that she invented and fought for. But I suspect that the people who keep telling us that don't really have the current regime's best interests at heart.
Liberal law professor Sandy Levinson writes that for himself and his fellow lefties that:
For many of us, this is an acid test as to whether the Obama Administration really does have backbone, except when Rahm Emanuel wants to curse liberals for not being sufficiently "understanding" of the need to capitulate, again and again, to self-proclaimed "realities." Some of the time, of course, Emanuel is absolutely right. But this isn't one of them. Both crass politics and the public interest make Elizabeth Warren the right person at the right time. If she is passed over, then "we" should insist that she be nominated to replace Ruth Bader Ginsburg, not least because it would really be wonderful to have someone on the Court who actually understands bankruptcy law and because, of course, it would be even more wonderful to have Elizabeth Warren construing the meaning of the various provisions of the 2300-page statute signed yesterday.
In the long run, I doubt very much whether the outcome of this fight will matter. Regardless of whether Warren is the agency's first chair or not, the odds are high that the agency will end up being captured by the banking and financial industries it is supposed to regulate.
IMF researcher Daniel Hardy explains that regulatory capture is "the possibility that the regulated institutions exercise excessive influence on the regulator. A captured regulator acts primarily in the interests of the regulatees, rather than in accordance with their putative mandate to promote the common good."
The seminal article by Stigler (1971) suggests that regulators are commonly subject to intense and effective pressure from regulated firms to modify regulations and their implementation to suit the interests of the latter (Laffont and Tirole, 1993, provide a useful overview). The regulated firms may exercise pressure at the political level, for example, by supplying politicians with one-sided evidence supporting their positions and attempting to gain their allegiance through campaign contributions. The regulated firms may exercise pressure and influence also at the level of the regulatory agency, for example, by implicitly offering agency staff lucrative employment opportunities in exchange for being cooperative, and generally inducing the regulators to identify with the regulated industry. Other interest groups may adopt similar tactics. As emphasized in Laffont and Tirole (1991) and Laffont (1999), regulatory capture is likely to be more effective when one interest group is highly concentrated and organized and has much at stake, and when the regulations are technically complex and asymmetric information is pervasive, so that outside verification is difficult. Most of the literature on regulatory capture is framed in terms of a regulated utility. Classic instances include a utility that lobbies for higher prices, a polluter that lobbies for higher emission limits, or a monopolist that lobbies for the retention of barriers to entry.
Hardy continues by arguing that "bank regulation may be especially susceptible to capture, and there is some evidence that capture has significantly influenced regulatory and supervisory decisions affecting banks and other financial institutions."
There is no reason to suppose that financial sector regulation is immune from capture, and features of financial markets may make the sector especially prone to it. Financial institutions’ vital interests are at stake in the formulation and implementation of regulations. The financial sector often contains a number of very large institutions, or is organized into powerful banking associations, which can afford lobbying efforts and well-prepared participation in public debate on regulatory measures. In contrast, other concerned interest groups, such as deposit holders, typically have more diffuse membership. Financial institutions tend also to be well connected to the political establishment and thus to have access to channels of influence. In the United States, for example, they are among the largest contributors to political campaigns.
As I said above, whether Warren gets the job or not won't matter ten years from now.
