Ber­nanke’s bully pul­pit

The Washington Times Weekly - - Editorials -

The U.S. econ­omy has slowed to a crawl. The fed­eral bud­get deficit is ap­proach­ing half a tril­lion dol­lars this year. The dol­lar is tank­ing. Global and do­mes­tic food and en­ergy prices are soar­ing. And long-term mort­gage in­ter­est rates are ei­ther un­changed or have jumped a full per­cent­age point com­pared to a year ago, which was four months be­fore the Fed­eral Re­serve be­gan slash­ing short-term in­ter­est rates . In this in­creas­ingly bleak at­mos­phere, Fed Chair­man Ben Ber­nanke de­liv­ered a speech May 5 de­tail­ing what a swell con­sumer ad­vo­cate the Fed has be­come since it awoke from the reg­u­la­tory siesta that it took dur­ing the in­fla­tion of the hous­ing bub­ble.

“Prospec­tively” — no kid­ding — “we are com­mit­ted to pro­mot­ing an en­vi­ron­ment that sup­ports the home­own­er­ship goals of cred­it­wor­thy bor­row­ers. To this “[prospec­tive] end,” the Fed chair­man de­clared, pre­sum­ably with a guilty con­science, “the Fed­eral Re­serve Board has pro­posed new reg­u­la­tions to bet­ter pro­tect con­sumers from a range of un­fair or de­cep­tive mort­gage lend­ing and ad­ver­tis­ing prac­tices.” In ad­di­tion to se­curely lock­ing the barn door af­ter the horses bolted nearly two years ago (when hous­ing and barn prices peaked), Mr. Ber­nanke re­ported that the Fed “also is con­tin­u­ing its long-stand­ing prac­tice of pro­vid­ing ed­u­ca­tional and in­for­ma­tion re­sources to help con­sumers make in- formed per­sonal fi­nan­cial de­ci­sions, in­clud­ing choos­ing the right mort­gage.” He even in­vited con­sumers “who be­lieve they have been treated un­fairly by their lender” to con­tact the Fed­eral Re­serve Con­sumer Help Cen­ter.

Don’t mis­un­der­stand. Be­cause of its demon­stra­ble in­abil­ity to set or con­trol long-term in­ter­est rates, the Fed did not cause the hous­ing bub­ble, which was largely pro­duced by the tril­lions of dol­lars in over­seas sav­ings that flooded U.S. fi­nan­cial mar­kets ear­lier this decade and pushed long-term in­ter­est rates to near-his­toric lows. But the Fed did fail to use its bully pul­pit and its reg­u­la­tory pow­ers to guide the mort­gage in­dus­try away from its propen­sity in 2005 and 2006 to is­sue ex­otic mort­gages to “home­debtors.”

With the col­lapse of hous­ing prices, many of those “home­debtors” now find that they owe more on their mort­gage than their houses are worth. In the un­likely event that lenders and mort­gage in­vestors don’t know what’s in their best in­ter­est, Mr. Ber­nanke mounted his bully pul­pit and told them (again) that they need to write-off large por­tions of their loans so that the U.S. tax­payer can then guar­an­tee new mort­gages that would be in­sured by the Fed­eral Hous­ing Ad­min­is­tra­tion. As hous­ing prices con­tinue to plum­met, that’s not a good idea, es­pe­cially when those “home­debtors” would still have lit­tle, if any, skin in the game.

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