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July 15th, 2009

Coalition’s Report Challenges Fed’s New Role

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A coalition of investors, analysts, and ex-regulators are issuing a report today that challenges the president’s plan to give the Federal Reserve sweeping powers over several financial markets. The Treasury’s Financial Regulatory Reform: A New Foundation proposes “New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.” The reform goes onto propose several other new and additional supervisory and regulatory responsibilities for the Fed.

The coalition disputes the Treasury’s reform by contesting that the Fed’s past track record indicates that they are unqualified for such new responsibilities (emphasis added):

Letting the Fed regulate all large financial groups would detract from its focus on monetary policy and could have “serious drawbacks” given its poor record in the run-up to the crisis, the report says.

It criticised the central bank for lax bank supervision and the role its low interest rate policy played in inflating the housing bubble earlier this decade.

“[The Fed’s] credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitised products,” the report says.

“Other serious concerns stem from the Fed’s regulatory failures – its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders – and the heavy influence banks have on the Fed’s governance.”

The bottom line here is that the coalition believes that if the Fed couldn’t regulate the financial industry before, what makes the president believe they can do it now?

However, we argue that the reform could allow the Fed to return to their original focus of monetary policy and examining the effects of their policies. Some of the coalition’s claims are rather vague and, without seeing their report, offer no solutions.

“Are these criticisms being made in hindsight, or were the members of the coalition making these claims all along,” asks HSH VP Keith Gumbinger. “Everything is easy and understandable in hindsight.”

Do you agree with the coalition’s criticisms of the Fed, or do you think the Fed deserves more credit?

(hat tip: Seeking Alpha)

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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