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.

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