Bernanke predicts bank failures, promises to start enforcing laws
In his semi-annual appearance before Congress, Federal Reserve Chairman Ben Bernanke predicted that the current economic crisis will likely result in bank failures:
On the second day of his biannual testimony to Congress, Bernanke said that some small US banks were likely to go under from the effects of the credit crunch and soaring mortgage delinquencies.
"I expect there will be some failures," he said. "I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."
He seems to imply that it's some kind of accomplishment or validation of Fed policy to let the maelstrom rage, as long as Citigroup and Bank of America aren't endangered.
In his prepared written statement to the US Senate Committee on Banking, Housing, and Urban Affairs (PDF is here), Bernanke finally addressed the fact that the Federal Reserve has failed to enforce the law regarding mortgage lenders. Since the Home Ownership and Equity Protection Act of 1994 (in addition to the Truth in Lending Act of 1968), the Federal Reserve has been charged with the responsibility of ensuring that mortgage lenders don't engage in shady, predatory practices against consumers. They're finally getting around to enforcing the law, fourteen years and millions of foreclosures later (I've included some paragraph breaks for readability):
In December, following up on a commitment I made at the time of our report last July, the Board issued for public comment a comprehensive set of new regulations to prohibit unfair or deceptive practices in the mortgage market, under the authority granted us by the Home Ownership and Equity Protection Act of 1994. The proposed rules would apply to all mortgage lenders and would establish lending standards to help ensure that consumers who seek mortgage credit receive loans whose terms are clearly disclosed and that can reasonably be expected to be repaid.
Accordingly, the rules would prohibit lenders from engaging in a pattern or practice of making higher-priced mortgage loans without due regard to consumers’ ability to make the scheduled payments. In each case, a lender making a higher priced loan would have to use third-party documents to verify the income relied on to make the credit decision. For higher-priced loans, the proposed rules would require the lender to establish an escrow account for the payment of property taxes and homeowners’ insurance and would prevent the use of prepayment penalties in circumstances where they might trap borrowers in unaffordable loans.
In addition, for all mortgage loans, our proposal addresses misleading and deceptive advertising practices, requires borrowers and brokers to agree in advance on the maximum fee that the broker may receive, bans certain practices by servicers that harm borrowers, and prohibits coercion of appraisers by lenders.
If the Fed had done its job in 1994, the sub-prime crisis could have been avoided. If lenders had been prohibited from engaging in predatory practices, and the Fed had enforced the law as they were required to do, the economic mess we currently face would not have happened. It may be too much to hope that the Fed is finally rejecting the anti-regulatory zealotry of the far right and is instead finally beginning to do its legally mandated job, but Bernanke is at least beginning to use the dreaded word "enforcement:"
The effectiveness of the new regulations, however, will depend critically on strong enforcement. To that end, in conjunction with other federal and state agencies, we are conducting compliance reviews of a range of mortgage lenders, including nondepository lenders.
Under the laissez-faire hand of Alan Greenspan and his deluded Randian disciples, we can now see the abject failure of hands-off economics. We continue to be trickled upon by the unscrupulous leaders of America's lending market, but unfortunately, it takes a crisis before regulators intervene and do their jobs.
That is part of the poisonous legacy of Republican economics, and it will resonate through our economy for years to come.