Fed Up

by dday

Alan Greenspan had an interesting change of heart today. He endorsed the Consumer Financial Protection Agency as an overseer of banks and lenders.

For Alan Greenspan, lapdog to Ayn Rand, perhaps the only person in America not to recognize the possibility of human greed in the financial markets, to come out for a federal body overseeing the Masters of the Universe, the same kind of consumer protections he opposed while chairing the Fed, is quite a turnaround indeed. But then Greenspan told us that he was rethinking his theories after the biggest financial collapse since the Depression.

Greenspan: I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms…

Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Greenspan: Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In particular, Greenspan said that the Fed’s current responsibilities are quite enough for the body to manage without the added layer of consumer protection. He might have gone a bit further and mentioned that, when faced with a choice between monetary policy and consumer protection, the Fed will always choose the former. They don’t exist for the mere consumer. You can see this in the performance of Alan Greenspan’s Federal Reserve during the housing bubble.

The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending […]

The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.

But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders’ compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

“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.”

Binyamin Appelbaum’s story is well worth reading. If the Federal Reserve were a rank-and-file employee, they would have been fired long ago.

I don’t know if Greenspan is trying to atone for past sins or actually learn from past experience. But when you have Greenspan and the World Bank in agreement with the likes of Elizabeth Warren, that Fed powers have grown too strong and a separate entity needs to be charged with protecting people who enter into financial arrangements, there clearly is a growing consensus here.

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