http://www.washingtonpost.com/wp-dyn/content/article/2009/09/26/AR2009092602706.html?nav=rss_business&sid=ST2009092602937
The Federal Reserve is best known as an economic shepherd, responsible for adjusting interest rates to keep prices steady and unemployment low. But since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers. Congress also authorized the Fed to write consumer protection rules enforced by all the agencies.
During the boom, however, the Fed left those powers largely unused. It imposed few new constraints on mortgage lending and pulled back from enforcing rules that did exist.
"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."
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A response letter signed by Gramlich, who died in 2007, said the Fed had all the authority it needed if it wanted to act. "The existing structure has not been a barrier to Federal Reserve oversight," he wrote.
The Fed's reluctance was part of a broad governmental retreat from oversight of the financial industry. Greenspan and many politicians in both parties saw regulation as a blunt instrument that often deprived more people than it protected.
"There was a long period when things were going very well and regulation was viewed as something that got in the way," said Alice Rivlin, the Fed's vice chairman from 1996 to 1999 and now a fellow at the Brookings Institution.
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The Fed also minimized repeated warnings about mortgage lending abuses in part because it was an institution dominated by big-picture economists focused on the health of the broader economy rather than the problems faced by individual borrowers.
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NO ONE could drive a car well for very long on roads without traffic lights, stop signs, or speed limits. There is an obvious need for sensible regulation, even “command and control” regulation, to facilitate safety and traffic flow. Likewise with most markets, particularly the financial markets, where some degree of regulation is necessary to prevent fraud and provide order, stability, and coherence to private transactions. Yet the Washington Consensus has denied the need for regulation of the financial marketplace at every level. Jagdish Bhagwati, a prominent free-trade economist, has referred to the “Wall Street-Treasury-IMF complex” to suggest a policy agenda formulated and pushed by powerful financial interests. Joseph Stiglitz, the 2001 Nobel laureate in economics, has noted the agenda’s many unscientific assumptions and refers to its promoters as “free market fundamentalists.”
At the very local level of finance—consumer credit and housing loans—the analogue to speed limits and traffic-flow regulation would be limits on loan volumes, interest rates, and minimum down payments. For years the federal government had regulated such lending standards to prevent inflation of asset prices in key sectors of the economy, particularly during wartime and boom times. For instance, Federal Reserve Regulation X required minimum down payments and maximum periods of repayment for housing loans. Federal Reserve Regulation W utilized the same devices for consumer credit for the purchase of automobiles, appliances, and other durable goods.
But starting with the administrations of Jimmy Carter and Ronald Reagan, and continuing under Clinton, such regulations were mostly repealed. Known as “selective credit controls,” these policy instruments took a “command and control” approach to regulation. It was an approach that reduced systematic risk by discouraging the development of a subprime mortgage market for borrowers with bad credit. Without such controls, lenders started making a flood of loans without minimum down-payment requirements, and eventually without even requiring documentation of income on many loans. Adjustable interest rates and hidden balloon payments made these loans inherently more risky.
Predatory lending was not an invention of the Bush administration. High-interest payday loans and subprime mortgages took off under Clinton. The morals of the marketplace were once again, “Buyer beware.” Many loans, tellingly referred to as “teaser loans,” were structured so that the monthly mortgage payments would start off low and rise significantly in the future, even while the overall loan amount—the outstanding principal—would also rise. The borrower would end up worse off several years into the mortgage than when the loan began.
But none of this was considered overly problematic by the Clinton White House. There was simply too much money to be made by lenders, brokers, bankers, bond insurers, ratings agencies, engineers of securitized assets, and managers of special investment vehicles and hedge funds. There was also too much to be gained by elected officials and regulators looking the other way.
By 1995, the subprime loan market had reached $90 billion in loan volume, and it then doubled over the next three years. Rising loan volume led to a significant deterioration in loan quality. Meanwhile, by March 1998, the number of subprime lenders grew from a small handful to more than fifty. Ten of the twenty-five largest subprime lenders were affiliated with federally chartered bank holding companies, but federal bank regulators remained unconcerned.
In 2000, Edward Gramlich, a Federal Reserve governor, proposed to Greenspan that the Fed use its discretionary authority to send bank examiners to the offices of such lenders. But Greenspan was opposed and Gramlich never brought his concerns to the full Federal Reserve Board.
Ignored comment.
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Response by stevejhx
almost 17 years ago
Posts: 12656
Member since: Feb 2008
Yawn.
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Response by nyc10022
almost 17 years ago
Posts: 9868
Member since: Aug 2008
Yes, I said this about 4 weeks ago... with lots of disagreement posted.
Gov already had the power, they just didn't use it.
Ignored comment.
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Response by The_President
almost 17 years ago
Posts: 2412
Member since: Jun 2009
zzzzzz
Ignored comment.
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Response by detournement
almost 17 years ago
Posts: 31
Member since: Aug 2009
Riversider - I'm not sure I can communicate how much I love that you are re-posting articles from 'Dissent' magazine in a NYC real estate forum.
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Response by nyc10022
almost 17 years ago
Posts: 9868
Member since: Aug 2008
Wasn't alpo just talking about wasting space on this board?
http://www.dissentmagazine.org/article/?article=1229
NO ONE could drive a car well for very long on roads without traffic lights, stop signs, or speed limits. There is an obvious need for sensible regulation, even “command and control” regulation, to facilitate safety and traffic flow. Likewise with most markets, particularly the financial markets, where some degree of regulation is necessary to prevent fraud and provide order, stability, and coherence to private transactions. Yet the Washington Consensus has denied the need for regulation of the financial marketplace at every level. Jagdish Bhagwati, a prominent free-trade economist, has referred to the “Wall Street-Treasury-IMF complex” to suggest a policy agenda formulated and pushed by powerful financial interests. Joseph Stiglitz, the 2001 Nobel laureate in economics, has noted the agenda’s many unscientific assumptions and refers to its promoters as “free market fundamentalists.”
At the very local level of finance—consumer credit and housing loans—the analogue to speed limits and traffic-flow regulation would be limits on loan volumes, interest rates, and minimum down payments. For years the federal government had regulated such lending standards to prevent inflation of asset prices in key sectors of the economy, particularly during wartime and boom times. For instance, Federal Reserve Regulation X required minimum down payments and maximum periods of repayment for housing loans. Federal Reserve Regulation W utilized the same devices for consumer credit for the purchase of automobiles, appliances, and other durable goods.
But starting with the administrations of Jimmy Carter and Ronald Reagan, and continuing under Clinton, such regulations were mostly repealed. Known as “selective credit controls,” these policy instruments took a “command and control” approach to regulation. It was an approach that reduced systematic risk by discouraging the development of a subprime mortgage market for borrowers with bad credit. Without such controls, lenders started making a flood of loans without minimum down-payment requirements, and eventually without even requiring documentation of income on many loans. Adjustable interest rates and hidden balloon payments made these loans inherently more risky.
Predatory lending was not an invention of the Bush administration. High-interest payday loans and subprime mortgages took off under Clinton. The morals of the marketplace were once again, “Buyer beware.” Many loans, tellingly referred to as “teaser loans,” were structured so that the monthly mortgage payments would start off low and rise significantly in the future, even while the overall loan amount—the outstanding principal—would also rise. The borrower would end up worse off several years into the mortgage than when the loan began.
But none of this was considered overly problematic by the Clinton White House. There was simply too much money to be made by lenders, brokers, bankers, bond insurers, ratings agencies, engineers of securitized assets, and managers of special investment vehicles and hedge funds. There was also too much to be gained by elected officials and regulators looking the other way.
By 1995, the subprime loan market had reached $90 billion in loan volume, and it then doubled over the next three years. Rising loan volume led to a significant deterioration in loan quality. Meanwhile, by March 1998, the number of subprime lenders grew from a small handful to more than fifty. Ten of the twenty-five largest subprime lenders were affiliated with federally chartered bank holding companies, but federal bank regulators remained unconcerned.
In 2000, Edward Gramlich, a Federal Reserve governor, proposed to Greenspan that the Fed use its discretionary authority to send bank examiners to the offices of such lenders. But Greenspan was opposed and Gramlich never brought his concerns to the full Federal Reserve Board.
Yawn.
Yes, I said this about 4 weeks ago... with lots of disagreement posted.
Gov already had the power, they just didn't use it.
zzzzzz
Riversider - I'm not sure I can communicate how much I love that you are re-posting articles from 'Dissent' magazine in a NYC real estate forum.
Wasn't alpo just talking about wasting space on this board?
He's not only our moron, he's our hypocrite, too.