The Wall Street Journal is reporting FDIC Chairwoman Calls for Activism.
Federal Deposit Insurance Corp. Chairwoman Sheila Bair said Monday policy makers needed to consider a more "activist" government response to prevent an escalation of foreclosures even if such measures aren't "politically popular."
Among Ms. Bair's points:
1) An activist government response with tax dollars is likely needed as voluntary loan modifications aren't working fast enough.
"We've got a real problem. And I do think we need to have more activist approaches. And I think it will be something we need to be honest with the American public about. We do need more intervention. It probably will cost some money."
2) Regulators are "increasingly concerned" about the risks posed by high concentrations of commercial real estate loans at banks, especially at financial institutions with between $1 billion and $10 billion in assets.
3) The Federal Reserve's response to help rescue Bear Stearns has raised public policy questions about the lack of a federal mechanism to recognize when big investment banks run into major problems. She said this was different than the "prompt corrective action" rules for commercial banks that would immediately require a regulatory response if a bank fell into severe trouble.
Activism Is To Blame
Sheila Bair goes on with three additional points, never bothering to figure out that it was activism that caused the problem.
Activism by the Fed on interest rate policy. The Fed slashed interest rates to 1% in 2003-2004 to bail out banks deep in hock with bad debts to foreign governments that were defaulting and to dotcom companies that were imploding. The biggest housing bubble the world has ever seen arose from this activism. Some will claim that the Fed is merely following the market when it cuts rates. I take a completely different viewpoint. Please see Fed Uncertainty Principle for an explanation.
Activism by Congress to create affordable housing led to misguided creation of GSEs, government sponsorship of the ownership society, and 300 some odd affordable housing programs. There has never been an affordable housing program in history that worked. For a recent example of how spectacularly affordable housing projects can blow up, please see Affordable Housing Project Turns Radioactive.
Activism by the Fed creating an alphabet soup of new lending facilities: TAF, TSLF, PDCF. This activism was needed because prior activism that created the housing bubble is now blowing up. See Fed Defends The Indefensible for more on the alphabet soup of lending facilities.
New Calls For Activism
Calls for activism are now arising from nearly every corner, even some surprising ones. Sadly, some do not even see their solutions for what they are: activism. Please consider A Global House of Cards: Interview with Josh Rosner.
In the two decades of Greenspan's tenure, the Fed's Washington staff, other regulators and the Congress allowed and enabled Wall Street to migrate more and more of the investment world off exchange and into the opaque world of over-the-counter derivative instruments and structured assets. This change is described by people like Greenspan and Treasury Secretary Hank Paulson as "innovation," but our old friend Martin Mayer rightly calls it "retrograde."
BSC failed not because it had too little capital or too little liquidity, but because the thousands upon thousands of OTC trades which flow through the firm's books are bilateral rather than exchange traded. It was the understandable fear of counterparty risk, not a lack of capital or liquidity, which killed BSC. The irony is that the "financial innovation" of OTC derivatives and structured assets takes us backward in time to the chaotic situation that existed in the US prior to the crash of 1929.
Would that the Congress and the Fed had the courage to confront Paulson and the other banksters who have turned America's financial markets into an increasingly unstable, derivative house of cards. If all federally insured commercial banks, mutual and pension funds were required by law to invest only in SEC registered, exchange-traded instruments, the threat of further systemic risk could be eliminated tomorrow. What a shame that neither Chairman Bernanke nor FRBNY President Timothy Geithner said that last week when they appeared before the Senate Banking Committee.
The article is a good read. However, Institutional Risk Analyst (IRA), comes up with the wrong answer: activism disguised as regulation.
Is Regulation The Answer?
Regulation is just activism of a different kind.
The root cause of this mess is the Fed and government intrusion into private affairs. The cure is not more regulation which is in reality nothing more than activism in disguise, but less Fed and less government intervention into free markets.
Let's now take a look at snips of the interview interspersed with my comments.
Rosner: We have a universe of government programs to encourage home ownership, but we need to reconsider the benefits of getting people into homes and how to craft government policies to make these markets more rather than less stable.
My Comment: The government absolutely should not be considering the benefits of home ownership and promoting them. Government sponsorship helped create the mess and the cure is to get government out of the way totally, not more misguided regulation. There would not need to be regulation, if there was no government sponsorship.
Rosner: FNM has announced that they will give a $15,000 loan to borrowers with negative equity so that they can pay down some of their principal balance and therefore refinance into a new mortgage. First of all, this loan is not secured by the property but rather by the personal guarantee of the borrower.
The IRA: So FNM is getting into the consumer lending business? Looks like more mission creep.
My Comment: Mission creep always starts with a mission. The mission here was affordable housing. Now Fannie Mae will accept mortgages up to $740,000. It is absurd to call that affordable. There is one and only one way to end mission creep: end the mission.
The IRA: So let's go overseas for a second. We know you have to get packed and head back to the airport.
Rosner: In the UK, we have already seen a 10% decline in commercial real estate values. And my contacts in that market expect to see a further 10% decline from there. ... The same global banks with exposure to the US residential and commercial markets also have exposure to the burgeoning problems in the Spanish real estate market, Irish housing problems, UK housing problems, and Italian housing problems.
The IRA: So do we detect the first signs of interest rate ease in the EU?
Rosner: Definitely. I think we are at the front end of the day when you want to be long the dollar and short the Euro.
My Comment: Trichet and the ECB are still talking tough and hanging tough. When the ECB does concede it's time for a policy change, the dollar is likely to soar vs. the Euro. The Euro is far to over-loved at this juncture given the state of German bank and various property bubbles in Europe.
The IRA: To change gears a bit, what is your reaction to the Paulson proposal?
Rosner: As usual, I think the proposal is largely misunderstood. To me this is more about Paulson creating a legacy rather than expecting the regulatory reform agenda to move forward in an election year. The most glaring part that was missing was rating agency oversight. The rating agencies were at the center of the problem with structured assets and continue to be at the center of the problem. Either the SEC must be given new powers to regulate the rating agencies or we need a new regulator, but the silence on this count in the Paulson proposal was striking.
My Comment: Once again Rosner sees the current problem but fails to take that problem back to the root cause. The problem most assuredly is not lack of regulation of the rating agencies. The problem is government sponsorship of the rating agencies. If we go down the path of adding regulators we will soon be looking for watchdogs to regulate the regulators. There is only one way to fix this problem: eliminate government sponsorship of the rating agencies. I discussed this idea in Time To Break Up The Credit Rating Cartel.
Inquiring minds interested in a very humorous graphical representation of the Bernanke plan vs. the Paulson plan should take a look at Two Wrongs Make A Wrong.
Calls for activism are coming from nearly every corner. Some are openly calling for activism, but equally dangerous, perhaps even more dangerous, are those who are calling for more regulation instead of addressing the root problems. The cure is not more regulation which is in reality nothing more than activism in disguise, but less Fed and less government intervention into free markets. Mission creep is the problem and the only way to end mission creep is to stop misguided missions before they start, not heap more regulation on them.