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links for 2007-09-30

Summers: The Fed Should Not Have the Consumer Protection Mission

Larry Summers says that the Federal Reserve should not have the financial consumer protection mission because, organizationally and bureaucratically, it is next to impossible for it to carry it out well:

Summers: Fed Fouls Out on Consumer Protection: Former Treasury Secretary Larry Summers suggested today that the Federal Reserve might be best staying out of the consumer-protection business.

I think it’s clear that when you vest regulation for consumer protection with agencies like the Federal Reserve whose primary mandate is the health of the financial system or the health of the lenders, you are going to get insufficient vigilance with respect to consumer protection

he said during a panel discussion for the Brookings Institution’s Hamilton Project.

The Fed has been under fire from Democrats in Congress and consumer advocates all year for not using its existing powers more forcefully either to prohibit questionable practices in the issuance of subprime mortgages, or to more broadly examine subprime lenders for such practices, in particular those that aren’t banks. Some Democrats have suggested taking some of those responsibilities away from the Fed. The Clinton Treasury Department, prior to Mr. Summers becoming secretary, had at one point sought to take most of the Fed’s supervisory responsibilities away and consolidate the country’s four banking regulators, but it backed off in the face of resistance from then-Chairman Alan Greenspan and the banking industry. Current Treasury Secretary Henry Paulson has also said the U.S. may have too many banking regulators.

Mr. Summers, who now teaches at Harvard, warned that even though many people have been misled into buying homes without understanding the terms, simply aiming to minimize the number of foreclosures — by deferring homeowners’ payments to later years — risks “repeating the error.” Policy needs to distinguish between people who could stay in their homes and are “suffering from a confidence problem” and those who are in a “non-viable situation” and should receive transitional assistance.

Mr. Summers also said later that the Fed over the last 20 years has had “something that’s much closer to a Golden Glove fielding average” — a reference to its defensive actions in guiding the economy — “than it has a [high] batting average in terms of getting its decisions right.” The Fed’s role in spurring the rise of adjustable-rate mortgages over fixed loans “will not be remembered as its finest hour,” he said.

--Sudeep Reddy and Greg Ip

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