The Fed's "Hands Off" Subprime Policy, a Regulatory Failure to Beat all Regulatory Failures
The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending.
They began to present research in 1999 showing that large banking companies including Wells Fargo and Citigroup had created subprime businesses wholly focused on making loans at high interest rates, largely in the black and Hispanic neighborhoods to the south and west of downtown Chicago.
The groups pleaded for regulators to act.
The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.
But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.
The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.
"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."
Listen, if this isn't enough evidence by itself to warrant a full investigation into the Federal Reserve's blatant failure in its supposed regulatory duties I'm not sure what is. Why are we looking at handing them the keys again? Can someone remind me?
I hate to say this but that's what you get when you put a psychotic libertarian in charge of the Fed (emphasis on psychotic). Granted, Greenspan is also a homicidal maniac but is it really wise to put the guy who thinks regulation is ridiculous in charge of regulation?