So is consumer financial protection a good idea?

UNITED NATIONS DEVELOPMENT PROGRAMME // FLICKR

Suppose you walk into a bank, asking for a student loan of $20,000. The loan officer, smiling, says he can offer you a ten-year loan for $20,000, at a 10 percent interest rate, compounded monthly. He gets your application approved, signs you on and collects his commission.

Two years later, you realize your student loan costs more than 10 percent interest. Thanks to time-value of money, the effective rate you are paying is actually closer to 10.5 percent a year. And the loan officer never told you.

Congress may change how loan products are advertised. Senator Chris Dodd, D-Conn., has released a discussion draft overhauling the entire financial regulatory reform system. The bill covers the entire financial sector, from personal finance to investing to risk management. Students and new grads should be concerned with two new provisions:

1. Creation of a Consumer Financial Protection Agency (CFPA) Consumer protection never became a major issue until the book The Jungle showed us what is really in our meat. With our real-life experiences of AIG and the mortgage crisis, Congress wants an agency that enforces truth-in-lending standards, enforced by a central agency.
2. “End too big to fail” programs Firms like AIG, Washington Mutual, and General Motors received government bailouts because their failure would make the economy far worse. The new would not force the government to chose between collapse or a bailout, but create an orderly wind-down mechanism for these companies.

The Obama Administration has put some muscle behind this. Today, Treasury Secretary Timothy Geithner expressed his support for the bill, in a Washington Post column. Learn more here.