During a speech in Washington yesterday Federal Reserve Chairman Ben Bernanke called for "tougher regulations" on banks. According to Ben "that is a fair price to pay after the damage caused by the 2008 financial crisis." Ben told his audience that "the crisis led to an enormous waste of resources" and that the proposed new rules are "well justified on a cost-benefit basis." In an amazing act of extreme hypocrisy Ben stated that "unsafe practices by large financial institutions pose a risk not just to themselves but to the rest of society." Coming from the man who heads the institution which was almost exclusively responsible for the Great Recession, that is hard to take.
Is it the case that banks were primarily responsible for the Great Recession? See this post to this blog for the answer to that question: 11-2-12. What interests me today is the gross hypocrisy of the Federal Reserve and the FDIC when they claim that banks took them by surprise and caused the Great Recession. These two government organizations, and the fools who populate them, make it sound as if banks were unregulated prior to 2008. If our omniscient and omnipotent rulers were regulating the banks prior to 2008 we should not have experienced the Great Recession. I have never heard a politician or a bureaucrat confess that his regulatory program does not work. So, were the banks subject to government regulation prior to 2008?
- Prior to 2008 all banks in the SDA were subject to regulatory supervision by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency and the Federal Financial Institutions Examination Council. All four of these regulators examine all federal banks on a regular basis. If anyone should know about the relative health of a bank, it is the federal government. If anyone should have foreseen the mortgage crisis, it should have been the federal regulators.
- In 1970 the Bank Secrecy Act empowered the federal regulators to force banks to provide information about your private accounts to the federal government without your knowledge or consent. In an amazingly hypocritical act, the 1999 enactment of Regulation P prohibits banks from giving your personal information to other profit seeking financial institutions without your consent. We find ourselves in the strange situation where banks are required to provide private information to the government, where it is stored in a gigantic data base to eventually be used against you in a court of law, while at the same time they are forbidden to provide it to a profit seeking corporation that might have something to sell you that you would like to purchase.
- In 1968 Regulation Z (Truth in Lending Act) was created. It required banks to fully disclose the terms and conditions of all consumer loans. According to the terms of this regulation no consumer would ever be able to claim that he was the victim of "predatory lending" since, by definition, he was fully aware of everything he was doing. The federal regulators never said that they were not enforcing Regulation Z. As far as we know, federal regulators were on top of the situation in 2008 and no "predatory loans" were being issued.
- 1970 saw the creation of the Fair Credit Reporting Act. This act forced banks to standardize their procedures in procuring credit reports about potential customers. It also provided rules in regards to customer knowledge about changes to your credit report. As far as we know the federal regulators were enforcing this act and every bank client was fully informed about the status of his credit report.
- 1974 saw the creation of Regulation B, the Equal Credit Opportunity Act. This regulation was originally intended to prevent banks from determining whether to loan you money based upon anything other than your creditworthiness. It forbade discrimination based upon things like race and religion. It is hard to see why this regulation was necessary since banks were very unlikely to use any criteria other than creditworthiness when making a loan. After all, they are in the business of making a profit. Things were about to take a dramatic turn for the worse in 1977.
- The Community Reinvestment Act of 1977 completely reversed the provisions of the Equal Credit Opportunity Act and set the stage for the Great Recession. Under the terms of the Community Reinvestment Act banks were required to make loans to customers because they were not credit worthy. Conditions like income and race were the primary considerations involved when the decision to make a loan was made. Low income blacks, for instance, had highly preferential treatment when it came time to obtain a loan. Billions of dollars of loans were made by banks that would never have been made if the federal regulators had not required them to do so.
- As a side note and to show the extent of penetration into the daily activities of banks by federal regulators, Regulation D, first enacted in the 1930s and dramatically overhauled in 1978, regulates reserve requirements, early withdrawal policies from certificates of deposit, what qualifies as a DDA or NOW account, eligibility rules for interest bearing checking accounts and limitations on certain withdrawals from savings and money market accounts. The federal regulation is so particular it actually mandates the total number of transfers or withdrawals a bank customer may make in his account per month.
- In 1974 Regulation D was enacted. Also known as the Home Mortgage Disclosure Act, this body of regulations was enacted to force financial institutions to "maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving one- to four-unit and multifamily dwellings." (Wikipedia) Since 1974 the federal regulators and the federal government were exhaustively informed about the condition of the consumer loan market in the SDA. How can federal regulators possibly claim that they were taken by surprise when the housing bust took place?