The Federal Reserve not only sets monetary policy, it also plays a central role in guiding the nation's banking regulatory infrastructure. Without the Fed's leadership, other regulators could not take an effective stand against the frenzied mortgage lending of the early 2000s. But the Greenspan-led Fed was not anxious to use its considerable authority to significantly curtail mortgage lending.
The Fed's regulatory stature stems from its intimate relationship with the largest financial institutions, established as part of its monetary policy responsibilities. Given the importance of these institutions to the entire financial system, policies set by the Fed quickly radiate throughout the system. The Fed's leadership also stems from its enormous financial and intellectual resources; more economists work in the Fed system than in any other institution in the world. Most importantly, the Fed is largely independent: although not completely outside the political process, it is more able than any other regulator to adopt policies and positions without regard to what the president or Congress think.
Chairman Greenspan's reluctance to flex the Fed's regulatory muscles stemmed from his own oft-voiced skepticism about regulation. Greenspan believed a well-functioning market with the appropriate incentives could police itself more effectively than could government bureaucrats. Mortgage lending qualifies as such a market, Greenspan thought. Lenders ultimately had to answer to smart and self-interested global investors, who surely saw no lasting profit in making bad mortgage loans.
Greenspan wasn't the only policymaker who held such views; the 1980s and '90s had been marked by a steady march toward deregulation. The trend climaxed in 1999 with Congressional passage of the Gramm-Leach-Bliley bill, which overturned Depression-era banking laws barring banks from merging with securities dealers and insurance firms. The resulting financial holding companies were put under the regulatory domain of the Federal Reserve. The Basel II rules on banks' capital reserve requirements were being fashioned at about the same time. These rules rely heavily on market forces; how much capital banks need, and therefore how aggressive they can be in their lending, is determined mainly by the market value of their holdings. The fashion in banking circles was to let the market not old-fashioned regulators determine what was appropriate.
There was some notable dissent on this from within the Federal Reserve itself. Fed governor Edward Gramlich, a well-respected former economics professor from the University of Michigan, was notably vocal early in the lending boom. Gramlich, who was responsible for consumer affairs at the Fed, felt the central bank should take the lead in weeding out predatory lending by examining both the federally regulated banks under the Fed's auspices and their mortgage affiliates, which were not.11 These proposals went nowhere.
Chairman Greenspan argued that Gramlich's proposed examinations would not have stopped shady lending, and that they might inadvertently bestow on shady lenders the ability to claim the Fed's seal of approval.12 At various times, Congress also exhorted the Fed to address nagging concerns about excesses in the mortgage market. In 1994, the House and Senate passed the Home Ownership and Equity Protection Act (HOEPA), which authorized the Fed to prohibit unfair or deceptive mortgage lending.13 Under the HOEPA, the Fed has the authority to prohibit predatory lending practices by any lender, no matter who regulates it. The Fed used these powers only sparingly, arguing against the need for blanket rules on unfairness or deception. Each case is different, Fed officials claimed.
Almost a decade later, Congressional Democrats pushed the Fed to use its authority under the Federal Trade Act to write rules on unfair and deceptive lending practices. Again, it was to no avail. Greenspan tossed the ball back to Congress, saying the legislature was better suited to define the practices it wanted to bar and make whatever laws were necessary. In other words, if there was improper lending going on, Congress would have to deal with it not the Fed, and not, by extension, the nation's bank regulators.
Our website is not responsible for the information contained by this article. Webworldarticles.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
This article was sent to us by:
Silvia McVolan at
06102010
1. How to find professional help to recover the money owed to you
All articles in this directory are property of their respective authors. Additionally, read our Privacy Policy
© 2010 WebWorldarticles.com - All Rights Reserved. Partners: Gunblade Saga