To hear the nation’s top economic officials tell it, the worst effect of the reckless mortgage lending during the housing bubble is not mass foreclosures, bankruptcies, investor losses or credit seizures. It is the possibility that the turmoil could lead to new regulation.
Treasury Secretary Henry Paulson Jr. has inveighed against a “rush” to regulation following the mortgage meltdown, and two Treasury under secretaries, writing recently in The Financial Times, criticized calls for “immediate” regulation.
There is nothing sudden about the push for regulatory reforms. Consumer advocates have been warning for years about unfair and deceptive lending that has taken place in plain view of do-nothing regulators. All along, they have presented detailed analyses and recommendations for regulatory action. And yet, Mr. Paulson has dismissed even the suggestion that a lack of regulation may have precipitated today’s financial turmoil, saying that “history says it’s very difficult for policy to keep up with innovation.” His under secretaries chalked up the current mess to “benign” market conditions that bred “complacency” and impaired “discipline.”
That’s all way off. Turning a profit by making rotten loans to uncreditworthy borrowers — ruining families and neighborhoods in the process — requires a lot more creativity than selling the Brooklyn Bridge to a gullible immigrant. But it is hardly the kind of innovation we want to encourage. Financial bubbles are not benign. And “undisciplined” is inapt, to put it politely, to describe lender behavior that ranged from amoral to deceptive, predatory and fraudulent — and that was enabled by bankers and investors at the other end of the transactions.
During the bubble, regulators allowed financial market participants to run amok. To help ensure that does not happen again, consumer protections that have languished, like providing loan disclosures in a borrower’s native language, need to be reinvigorated and violators prosecuted. Loan-making standards need to be subject to regulatory scrutiny, both at banks and nonbanks. The system must be rid of perverse incentives that made it profitable for brokers and lenders to make reckless loans.
And to ensure that market participants have the information they need to make rational decisions — a crucial underpinning of orderly markets — hedge funds and other secretive investors need to be held to strict disclosure standards and government monitoring.
The Treasury Department has pledged to work internationally to develop regulatory responses to the current instability. That rings hollow from a department that has a clear antiregulatory bias and that has previously blown off multilateral regulatory efforts.
Congress should welcome whatever input the Treasury may offer. But it is clearly up to lawmakers to set a new course. They should act with due speed and due deliberation, mindful of the balance between protecting consumers and fostering economic vitality.
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