Why the Fed can’t protect consumers

By Felix Salmon
September 28, 2009
Binyamin Appelbaum's wonderful WaPo story? Well, you could start by asking Alan Greenspan:

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Why did the Fed refuse to police predatory subprime borrowers, as detailed in Binyamin Appelbaum’s wonderful WaPo story? Well, you could start by asking Alan Greenspan:

Alan Greenspan, then chairman of the Fed, recalled that Gramlich broached the subject at a private meeting in 2000. Greenspan said that he disagreed with Gramlich, telling him that such inspections would require a vast effort with no certainty of results, and that the Fed’s involvement might give borrowers a false sense of security.

In hindsight, both of these reasons are ludicrous. Policework, by its very nature, involves a lot of effort and no certainty of results. That doesn’t mean there shouldn’t be any policing. And did Greenspan honestly believe that subprime borrowers were that much more cautious when entering into mortgages because they knew that the Fed wasn’t policing the lenders?

In reality, of course, Greenspan was simply casting about for a reason — any reason — to indulge his deregulatory instincts.

This is why we need a Consumer Financial Protection Agency working in conjunction with the macroprudential regulator: the Fed simply isn’t good at consumer protection. And, pace Zoellick, Treasury wouldn’t be much better.

9 comments

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Policework, by its very nature, involves a lot of effort and no certainty of results. That doesn’t mean there shouldn’t be any policing.

Police might not be a good analogy. They usually don’t go out looking for crimes at random. Instead, they wait till the crimes are reported and then find out who did them.

Posted by Noumenon | Report as abusive

Do you sometimes think about putting something stupid in your posts so more people will comment? It’s difficult to say “I agree” so much.

Posted by jonathan | Report as abusive

“Police might not be a good analogy. They usually don’t go out looking for crimes at random..”

Read the WaPo article. The most important point was that the Fed was deluged by community watchdogs and similar groups with explicit reports of subprime malpractice and they consistently refused to do anything about it, for ideological reasons. The article showed a Fed which is completely untrustworthy in terms of looking out for consumer interests.

Posted by lark | Report as abusive

This may sound absurd but you make a lot more sense than anyone I know or hear talking about fiscal policy. I’d vote for you in a heartbeat.

Posted by Paul | Report as abusive

any correlation you find between “deregulation” and the current financial crisis is flawed and certainly does not imply causation.

you might be blaming the right person for the wrong reason. greenspan dipping his toes in “deregulation” isn’t it>

Posted by dvictr | Report as abusive

Ahem… excuse me, who wrote the following on 29 August 2009:

“This is one more reason why consolidating regulatory power in the central bank is a good idea: even if the central bank isn’t totally independent, it’s more independent than any other regulatory agency is ever going to be, and therefore less likely to become filled with political hacks. Say what you like about the Fed, you’re not going to see it demonstrate the kind of premeditated spinelessness that the SEC commissioners showed over most of the past 10 years.”

Posted by Carlomagno | Report as abusive

Hint: http://tinyurl.com/y8lklj6

Posted by Carlomagno | Report as abusive

Consumers have to look after themselves. The fed is a private entity with one thing in mind. To make a profit. The fed creates the money out of thin air and makes interest off of nothing. If it fails they get the goods and if not they get interest. Why do they want to police anything? Silly really. The U.S. federal government is so badly corrupt, you have to look out for yourself. I love greenspans statement.. “and that the Fed’s involvement might give borrowers a false sense of security.” This idea can be applied to every federal agency. Except of course the Federal Reserve for they are not federal and contain doubtful reserves. Look after yourself.

Posted by jason | Report as abusive

Even the “automatic” stuff depends on regulators — you need people to audit and make sure that companies are reporting accurately; you need other regulators to make sure that the things required of different “automatic” classes of company are in fact happening. Otherwise it’s a whole lot of sailboat fuel.

The question (as usual) is how you align the interests of the regulators with those of the public, or at least with the continuing existence of well-enforced regulation. Only way I can see is putting a whole lot of friction in the revolving door. This requires increasing compensation in the public sector and reducing it in the private, or perhaps something drastic like letting public employees in on qui tam suits…