Subprime Meltdown: What Will The Fed Do? Perhaps Congress Can Find Out

17 Jul Subprime Meltdown: What Will The Fed Do? Perhaps Congress Can Find Out

Ben Bernanke has been Chairman of the Federal Reserve for over a year now. During this time we have seen the subprime mortgage market begin to decline, to a meltdown, and onwards. The Chairman has so far remained fairly complacent, although the Fed did announce today that it will begin a pilot program (with other state and federal agencies) to investigate and crackdown on lenders who are breaking existing rules.

He will have an opportunity to explain why this week when he testifies before Congress, starting tomorrow. Click here for a webcast of the hearings beginning at 10 a.m. EST. (The committee will normally also archive hearing testimony.)

The irony is that the Federal Reserve is the one institution with the greatest regulatory power to change how subprime loans are made. Under the Truth in Lending Act, the Fed has the power to write rules which would ban unfair, deceptive acts and practices across the entire home-lending industry. No further laws need to be enacted in that respect if the Fed chose to act.

The Fed has taken the position for several years now that the best solutions to problems in the marketplace come from markets themselves. So where the market creates interest-only mortgages which allow people to buy homes but never pay them off (unless their income magically increases), the theory holds that either another lender will step in to offer a product which will help the consumer out of the situation — or the market will punish both the borrower and lender in the long run for making such a poorly-planned arrangement. The fact that a borrower’s credit may be ruined and her family out on the street is simply an unfortunate by-product of the normal market. They will be an object lesson for other borrowers not to take out such risky loans, you see?

This begs the question of course: Why do we have regulators to put limits on the free market if the regulators believe the unfettered market is the best option?

Since three nominees to the Federal Reserve’s seven-member board are awaiting confirmation by the U.S. Senate, one would suspect that Mr. Bernanke will need to provide more satisfaction to Congress if he hopes to have a fully-staffed board any time soon.

Related Posts Plugin for WordPress, Blogger...
The following two tabs change content below.
I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
No Comments

Sorry, the comment form is closed at this time.