SeriousBull

Reform the Fed by stripping away their purse

Tags: Banks + creditcards + Economy + FDIC + freddiemac + GNMA + mortgage + Risk Regulator

Since the beginning of the sub-prime housing implosion, the Bush Administration has staunchly re-assured us that everything is OK. Indeed, a year ago at the White House President Bush, Treasury Secretary Paulson, Fed Chief Ben Bernanke, and Commerce Secretary  Carlos Guitierrez all reassured us that this housing glitch was no problem and in any case only a minuscule part of the $9 trillion US economy so that any downside was easily manageable and expected to have a negligible effect on the US total

economic picture. In hindsight our clue that something greater was amiss was the fact that the four held a news conference at the same time. (If no problem would all four need to reassure us?) Since then, we have had some significant effects including a the shotgun merger of Countrywide Mortgage, the implosion of bond insurers MBIA and AMBAC, the Fed orchestrated bailout of Bear Stearns, the failure of Auction Rate Security market, the Fed life-line loans to Fannie mae and Freddie mac, and the run on IndyMac bank leading to its FDIC rescue to hightlight just a handful of the headline grabbing news.

Now SB’s criticism is not about the liquidity actions taken or even about the political pitch to reassure the world that the US financial system isn’t going to meltdown, its rather about the plan to make the Federal Reserve the chief “Risk Regulator” of the US financial system–for heaven’s sake Indymac bank was not even on the FDIC’s watch list of 90 or so problem banks!! Once again this instance of failure of oversight stands agina as a glaring indication of reactive policy. The point is SB has repeatedly criticized the Federal Reserve, that sits at the apex of the US financial system, as having failed in their oversight leading to this financial crisis, even causing it to occur. Had anyone at the FDIC’s, the Office of Thrift Supervison’s or Federal Reserve’s management staff been alert the underwriting of stated income loans with 100% + equity loan to value ratios would have been curtailed. Had any of these regulators been in touch with reality at a minimum reserve requirements would have been raised to deterrant levels to mitigate risk.  And now aside from printing money, throwing good money after bad, the Fed’s answer is to pull out one of their few remaining bullets and simply pay. This is the status quo of ineptness and we should rely on them to police the system going forward?

Congress must realize that the Fed is conflicted and ill-suited to do its job so long as it also holds the purse and makes the rules. Just look at the recent reforms to mortgage lending for more evidence. Just now they pass rules to require that the lenders will be barred from making loans to risky borrowers without proof of income to pay their loan.  Lenders will also be barred from penalizing borrowers for pre-paying their loans and lenders will be barred from making loans relying solely on the home equity value to pay it off when sold. Duh!  But the convert part of this policy is that it won’t take effect until October 2009! Why? Undoubtedly to provide banks extra flexibility to ignore these rules a bit longer to get the bad loans re-booked as performing loans on the bank’s balance sheets.

The conflicts arise with the Fed’s apparent all out support of profits for its constituent banks over prudence in oversight and concern for the public and fairness. Consider for example that the Fed has cut interest rates seven times to create extra spread for banks to shore up their profitability. The Fed has not required banks to pass on the savings to the consumer, instead the Fed has allowed banks to gouge consumers to replace profits. The only thing passed on to the consumer has been lower deposit rates. Moreover banks have hiked credit card interest rates to usury rates of 21-29% and recently the Fed apparently sanctions the newest scam among banks–putting seven day holds on large deposits even though funds are collected next day in many cases due to the the “Check 21″ laws that permit scanning and imaging and presentment of checks for overnight clearance and payment. If the Fed really had concern about the consumer and the economy and not just bank profitability it would take pre-emptive steps to crack down on predatory bank lending practices and use its considerable persuasive power to stop its constituent banks from gouging the consumer who is confronted with pressures of higher energy costs, uncontrollable health-care costs, falling home values and foreclosure. Indeed all empirical evidence indicates that the Fed is all about helping banks both by its policies and actions.  Both of which consistently demonstrate a total disconcern that piling on additional fees and high market interest rates only exacerbates the probability that the consumer will next default on their credit card debt.  

The point is that the Fed has a record of being repeatedly behind the curve and of consistently turned a blind eye to the obvious, unsound and unfair lending practices of banks in support their greater short term profitability.  No doubt the Fed would counter-argue that the consumer is not their charge. But the consumer makes up two-thirds of the economy by their spending and while it is obvious that the Fed has this one-dimensional profits view, the Congress should consider the ill effects such a point of departure has on the economic future and common good. If the Fed is anointed the Chief US Risk Regulator which seems as incredulous as having Enron execs become Sarbanes Oxley auditors, then the Fed needs to be stripped of the purse so it can’t cover its inept policies with taxpayer bailouts. Let Treasury hand out the bailout bucks to lend transparency and accountability, to separate regulatory oversight and enforcement from public payments for policy failures. It should be obvious to all that Greenspan’s Fed Speak to persuade Congress not to regulate hedge funds and derivatives in order for banks to be free to offload liabilities was driven by a biased, for profit motive. Demonstrably now we can see that the Fed is fixing these policy failures at the public’s expense and is not accountable. So reform the system. Do appoint a competent Chief Risk Regulator, just put some checks and balances in the system or expect greater future bailouts.

July 15, 2008 - Politics