Financial Times Editorial Comment: Time for the Fed to prevent a subprime rerun
Financial Times Editorial Comment: Time for the Fed to prevent a subprime rerun
Copyright The Financial Times Limited 2007
Published: July 19 2007 19:28 | Last updated: July 19 2007 19:28
Ben Bernanke, the chairman of the Federal Reserve, gave a testimony of two halves on his semi-annual visit to Congress. In the monetary policy half he repeated the Fed’s stance of the last year or so: more concerned about inflation than growth. In the other half he unveiled some sensible plans to prevent a repeat of the debacle in the subprime mortgage market.
On monetary policy Mr Bernanke said once again that the Fed’s biggest worry was a pick-up in inflation in 2008 and 2009. That stance looks right: the labour market is tight, growth is not far below trend, and the dollar’s 9 per cent fall against the euro over the last year is equivalent to a monetary loosening.
Mr Bernanke observed that credit spreads for risky assets such as corporate bonds have risen in recent days. But he noted that spreads remain low by historical standards and did not forecast further falls in bond prices. Given the Fed’s inflation concerns, he is probably happy to see some rise in the cost of borrowing to invest. There is certainly no reason to expect early cuts to Federal Reserve interest rates.
On banking supervision, another of the Fed’s responsibilities, Mr Bernanke had more to say. The Fed and other regulators have failed to stop some of the most vulnerable consumers in the US being sold high-interest mortgages they could not afford to service, some with onerous conditions, such as high penalties for early repayment. In his testimony Mr Bernanke indicated what he would do about it.
There are all manner of tricks – rates that start low and then rise, hidden penalties, and costs hidden in the footnotes – that a lender can use to disguise the true monthly cost of a mortgage. The Fed must be careful not to hinder product innovation or price competition, but it is right to suggest that some of these practices are abusive and should be banned, while others should be more clearly disclosed. Consumers must know what a mortgage is actually going to cost them.
The Fed, alongside other banking regulators, has also woken up to the need to scrutinise non-bank lenders, such as mortgage brokers, which have expanded fast in recent years. That is good, but with new institutions and practices emerging all the time – online person-to-person lending exchanges, for example – the Fed needs to look out for the next problem while it tackles the last.
The economy looks likely to weather this subprime crisis even if, as Mr Bernanke suggested on Thursday, total losses are in the order of $50bn-$100bn. But now is the time, through sensible regulatory action, to make sure there is no repeat.
Copyright The Financial Times Limited 2007
Published: July 19 2007 19:28 | Last updated: July 19 2007 19:28
Ben Bernanke, the chairman of the Federal Reserve, gave a testimony of two halves on his semi-annual visit to Congress. In the monetary policy half he repeated the Fed’s stance of the last year or so: more concerned about inflation than growth. In the other half he unveiled some sensible plans to prevent a repeat of the debacle in the subprime mortgage market.
On monetary policy Mr Bernanke said once again that the Fed’s biggest worry was a pick-up in inflation in 2008 and 2009. That stance looks right: the labour market is tight, growth is not far below trend, and the dollar’s 9 per cent fall against the euro over the last year is equivalent to a monetary loosening.
Mr Bernanke observed that credit spreads for risky assets such as corporate bonds have risen in recent days. But he noted that spreads remain low by historical standards and did not forecast further falls in bond prices. Given the Fed’s inflation concerns, he is probably happy to see some rise in the cost of borrowing to invest. There is certainly no reason to expect early cuts to Federal Reserve interest rates.
On banking supervision, another of the Fed’s responsibilities, Mr Bernanke had more to say. The Fed and other regulators have failed to stop some of the most vulnerable consumers in the US being sold high-interest mortgages they could not afford to service, some with onerous conditions, such as high penalties for early repayment. In his testimony Mr Bernanke indicated what he would do about it.
There are all manner of tricks – rates that start low and then rise, hidden penalties, and costs hidden in the footnotes – that a lender can use to disguise the true monthly cost of a mortgage. The Fed must be careful not to hinder product innovation or price competition, but it is right to suggest that some of these practices are abusive and should be banned, while others should be more clearly disclosed. Consumers must know what a mortgage is actually going to cost them.
The Fed, alongside other banking regulators, has also woken up to the need to scrutinise non-bank lenders, such as mortgage brokers, which have expanded fast in recent years. That is good, but with new institutions and practices emerging all the time – online person-to-person lending exchanges, for example – the Fed needs to look out for the next problem while it tackles the last.
The economy looks likely to weather this subprime crisis even if, as Mr Bernanke suggested on Thursday, total losses are in the order of $50bn-$100bn. But now is the time, through sensible regulatory action, to make sure there is no repeat.
posted by Carlos T Mock at 3:22 AM
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