Smith
Faculty Opinion Article
The 30
Seconds Outlook
May 15, 2009
|
"[The world is ] ... now in the midst of the worst
financial crisis since the Second World War ... I am convinced that the
misbehavior of some would have been much rarer -- and far less damaging to our
economy -- if the Federal Reserve and, to a lesser extent, other supervisory
authorities, had measured up to their responsibilities."
|
|
— Henry
Kaufman, Wall Street
economist and monetary
expert, April 2009 |
The prior Outlook notes the need
for effective legislation arising
primarily from failures of
deregulation of the secondary
mortgage market. The Depository
Institutions Deregulation and
Monetary Control Act of 1980 and the
Alternative Mortgage Transactions
Parity Act of 1982 substantially
deregulated residential mortgage
credit. These acts left disclosure
as the only significant regulatory
tool. The Home Ownership and Equity
Protection Act of 1994 imposed rules
to curtail abuses in the subprime
mortgage market, but its coverage
was too limited. However, federal
regulators also contributed to
problems in the deregulatory
framework. Federal banking
regulators were unwilling in the
deregulatory climate to exercise
their yet substantial powers for
rule making, enforcement, and legal
sanctions to stop the decline in
mortgage underwriting standards.
The Federal Reserve Board had the
power to curb the decline in
creditworthiness of mortgage
underwriting for all depository
institutions and mortgage lenders.
But, the Fed effectively failed to
exercise these powers in any
meaningful way until the mortgage
market dam broke. Only limited
enforcement action was taken against
nonbank mortgage lenders owned by
bank holding companies. And, the
Gramm-Leach-Bliley Act of 1999 gave
the Fed very limited power to
regulate nonbank mortgage lenders
owned by financial holding companies
created by the act, and it did not
request more legislation. The Fed
leadership was in “shocked
disbelief” when its preference for
continuing deregulation failed.
John A.
Haslem
