The Failed Subprime Clampdown

Matt Apuzzo’s excellent article on how the goverment failed to reign back subprime mortgage lenders paints a picture of deregulation run amok:

The administration’s blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

My take however, is that the truth is more mundane: the proposals simply got killed by the fact that there were too many regulators, none of which had the breadth necessary to implement something along these lines. This is only the beginning:

The government’s banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision.

More importantly:

The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn’t even be able to sell their way out of the mess.

It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency’s former deputy comptroller.

Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not.

This is worth underlining. Even if the OCC, the FDIC, the Fed, and the OTS had miraculously managed to come to unanimous agreement on curtailing subprime lending, it still wouldn’t have helped much — because between them, they only had regulatory control over banks. Any subprime lenders which didn’t take deposits — and there were hundreds of them cropping up all over the country, originating loans and selling them on to investment banks to be packaged into bonds — would have remained outside the regulatory reach.

In other words, without major regulatory consolidation, nothing effective was going to happen in any event. There’s a general consensus in Washington now that we need a super-regulator with teeth, and the US might be able to learn from the UK’s lessons in setting up the FSA. Once we have that, doing things like clamping down on subprime lending might become a great deal easier.

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