An interesting story came out over the weekend; it looks like the Fed is finally going
to do something about the ridiculous lax standards in our mortgage industry. My
thoughts (a) bravo - about time (b) why must there always be a disaster before
people do anything about a problem?
Again, I am apolitical (meaning I think both parties are a disaster) but if Republicans are worth their salt, they should be fighting the initiatives below tooth and nail because the "free market fixes everything." After all, this was the reasoning behind having little to no regulation in the first place.
In the big picture I do agree free markets fix everything... in the very long run. But the disclocations caused in the short and middle run can be devastating before things get to equilibrium. Unfortunately we have such wackos on both sides of the political extreme (either regulate everything or don't regulate anything and let harm play out) that common sense approaches seem to stall. Only when we have disasters (i.e. Katrina, Enron era) does anything happen. But as long as good times are rolling and profits are piling up no one cares about the underlying issues.
For those who hate regulation I say to you - lets get rid of the police force entirely. That is a form of regulation. Instead everyone would arm themselves and we'd move to a "Mad Max" world (think Baghdad). Tribes and clans fighting over land and resources - why just like the 11th century. That's progress! In the end the free market would solve everything, but not before extreme harm and destruction in the short and middle run. This is how I think of all regulation.
Humans are at their basis self preserving. To ignore that and say "let everything sort itself out in the free market" without any check on human behavior itself is pure insanity. And the irony now is those who purport to be free marketers are the ones wailing loudest for bailouts, Fed cuts, etc.
The next few things I expect to blow up in the next decade are our
infrastructure (the bridge in MN is just a preview) and our air traffic control
system. Both have been warned about for 20+ years as antiquated and in
disrepair. But we continue to ignore them - it costs too much to fix them, and
we have wars to wage after all. Until I suppose 800 people die on a bridge in
NYC or 2 planes collide midair - then it will be an issue. Typical
reactive (not proactive) government.
Anyhow the proposals below are actually sensible. Too bad they weren't around half a decade ago.... or two decades ago...
- People taking out home mortgages may gain new protections soon against shady lending practices as the Federal Reserve seeks to back even the riskiest borrowers, already hit hardest by the housing and credit crunches.
- The plan from the Fed, which has regulatory powers over the nation's financial system, could be finalized next year. The effective date would be know then.
- The Fed is considering:
- barring lenders from penalizing subprime borrowers -- those with spotty credit or low incomes -- who pay their loans off early.
- forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance. (that's a concept....)
- restricting loans that do not require proof of a borrower's income. (which were originally meant for high net worth borrowers, not Joe Six Pack making $35K a year)
- examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.
- improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
- curtailing abuses in mortgage advertising.
- The issue has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures.
Many simple solutions that a group of 10 non-partisan, intelligent, men and women could sit in a room for 8 hours and figure out. But there are far too many special interest groups to allow it to happen until a national crisis develops. And then the public outcry will finally outweigh the views of those lining the pockets of our politicians.
And it will repeat... somewhere else in the system, in 4-5 years.