[Corp. Watch] Fed up: Orthodox economics prevented financial regulation

[Corporation Watch]

The Fed Awakens

  The Federal Reserve has long had the power to protect
  consumers -- but until now, it just chose not to use it

By Stephanie Mencimer

(Mother Jones, Jan. 29) -- The good news: The Federal Reserve Board,  
the overseer of the nation's monetary system, has hired a consumer  
activist. The bad news: The Fed won't let him talk to the press.

	In September, the stodgy financial regulator took the unusual step of  
hiring scrappy consumer advocate Allen Fishbein, who most recently  
worked at the Consumer Federation of America as its director of  
housing and credit policy.

	For years, Fishbein had sounded the alarm about abuses occurring in  
the sub-prime lending market and the dangers of deregulating the  
banking industry. He's now an adviser to Sandra Braunstein, the  
director of the Fed's division of consumer and community affairs.

	His colleagues in the consumer protection world see Fishbein's hiring  
as one of a handful of indicators that the Fed is offering a mea culpa  
and trying to be receptive to average people, not just neoclassical  
economists.

	"I think the reason they brought Allen on is a recognition of their  
failure," says Ira Rheingold, executive director of the National  
Association of Consumer Advocates, who notes that the Fed "completely  
missed" the problems leading to the current financial crisis.

	In a sign, perhaps, that the Fed is still not entirely comfortable in  
its new role, Federal Reserve officials have decided to keep their new  
hire under wraps. Fishbein's hiring didn't merit a press release, and  
when Mother Jones attempted to profile him in his new role, it took  
the Fed more than a month to respond to a request for access.

	And when it did, the answer was no. (Even prying Fishbein's official  
job description out of the Fed was a chore.)

	The Fed's reluctance to publicize the existence of an outsider in its  
midst is typical of one of the nation's most conservative and opaque  
institutions. Change at the Fed has traditionally been glacial.

	But Fishbein's arrival there is one of several hints that real change  
is indeed afoot. Recent developments suggest that the Fed is cracking  
open the doors of the temple and may be taking a more aggressive  
approach to banking regulation on behalf of consumers.

	In December, for instance, the Fed issued new regulations reining in  
some of the more abusive practices of creditcard companies. Among  
other things, the rules require creditcard firms to mail bills at  
least 21 days before the payment is due, since many banks have created  
billing cycles so short that some customers are late in paying.

	Creditcard companies are also banned from arbitrary and undisclosed  
interest rate hikes. There's some indication, too, that the Fed is  
planning on tackling excessive overdraft fees on checking accounts, a  
major gripe of many consumers.

	Nessa Feddis, the senior federal counsel of the American Bankers  
Association, says that the new creditcard regulations were more the  
result of Congressional pressure than innovation by the Federal Reserve.

	Sen. Chris Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.) had been  
leaning on the Fed to use its authority to deal with credit card  
abuses, she says. Nonetheless, she agrees with the consumer advocates  
that the Fed is changing. Hiring Fishbein, whom she's known for many  
years, is out of character for the institution, Feddis says.

	While the Federal Reserve of course isn't saying as much, the reason  
for its unusual hire isn't hard to intuit. For one, it totally whiffed  
on preventing the sub-prime lending melt-down.

	Critics, including a former board governor, have fingered former Fed  
Chairman Alan Greenspan for failing to heed warnings from consumer  
advocates and Legal Aid lawyers who, even in the early '90s, were  
dealing with the wreckage of an out of control sub-prime lending market.

	It's not that the Federal Reserve didn't have the power to act; it  
just chose to remain on the sidelines. In 1994, Congress passed a law  
authorizing it to crack down on predatory and sub-prime lending by  
banks and other financial institutions.

	That law gave the Fed the power to regulate not just banks but all  
mortgage companies. It could have required some basic underwriting  
standards, like, say, insisting that mortgage lenders ensure that  
borrowers can actually repay their loans.

	It could have also curbed deceptive practices like teaser rates that  
increased sharply after a couple of years. If it had, the Fed might  
have averted much of the current financial mess. Instead, the board  
finally got around to issuing tough new lending regulations last year,  
long after the sub-prime industry had already imploded.

	Some Fed-watchers suspect that recent criticism of the institution  
has sunk in. Dan Immergluck, an associate professor of city planning  
at the Georgia Institute of Technology who has worked with the Fed,  
sees "an awakening" in the institution that for most of its history  
has been dominated by neo-classical economists, who viewed consumer  
protection as incompatible with the Fed's role of ensuring the safety  
and soundness of the banking system.

	As proof, he points to the Fed's response to a campaign last year by  
conservatives and mortgage industry officials to blame the Community  
Reinvestment Act (CRA) for the foreclosure crisis -- implying that the  
law, designed to combat racial discrimination in mortgage lending, had  
caused the melt-down. Immergluck says that the Fed governors  
forcefully disputed that notion, even posting research on the agency  
website to counter these claims.

	By contrast, Immergluck says, the CRA also came under attack in the  
late 1990s by conservatives such as former Texas Senator Phil Gramm,  
when Congress was deregulating the banking system. But back then, when  
Greenspan was the Fed chairman, the institution never defended the law  
or corrected the record when critics misconstrued it.

	He and other Fed-watchers attribute the change in tone and the Fed's  
new consumer protection focus to two things: the financial crisis,  
which laid waste to much of the conventional wisdom surrounding  
regulation of the banking sector, and a change in leadership.

	While Ben Bernanke has been harshly criticized for his handling of  
the bail-out, consumer advocates say that he has ushered in a sea  
change at an agency that was headed for so long by Greenspan, a  
libertarian whose idea of consumer protection was tinkering with  
mortgage disclosure forms.

	For years, the only real input consumers had on Fed policymaking came  
through involvement on the Fed's Consumer Advisory Council, a group  
that meets three times a year and provides feedback to the Fed  
governors.

	As many advocates are quick to point out, much of the council is made  
up of creditcard industry officials. Another chunk consists of  
representatives of community development groups that are clients of  
the Fed. Only a handful of council members are what most people would  
think of as traditional consumer representatives.

	Greg Squires, a professor of sociology, public policy, and public  
administration at George Washington University, served on the council  
from 1996 to 1998, during the Greenspan years. "We were there  
primarily to provide cover for the Fed so they could say they heard  
from consumer folks," he says, adding that Fed officials never really  
considered any of the council's recommendations, even after they had  
spent months drafting them.

	Kathleen Keest, an attorney with the Center for Responsible Lending  
who also served on the consumer advisory council in the early 1990s,  
says that the Fed never wanted the consumer protection role Congress  
empowered it with.

	Federal Reserve economists have tended to regard consumer protection  
regulations as a drag on the market, she says, so consumers have  
always been second-class citizens in the Fed's eyes.

	Keest says that the Federal Reserve has largely followed the advice  
of bankers, who have long argued that any sort of regulation of the  
market would lead to a reduction in access to credit.

	Now that the financial crisis has shown the opposite to be the case,  
Keest says that Fed officials have become slightly more willing to  
listen to the concerns of consumers. She says that the Fed is starting  
to realize that consumer protection is an important component of  
protecting the safety and soundness of the nation's banks.

	Hence the hiring of Fishbein, who will presumably advise Federal  
Reserve officials from a more grassroots perspective and flag  
potential threats to the financial system before they go critical.

	Rheingold says the changes are baby steps; The creditcard  
regulations, for instance, are "too little, too late" in part because  
they don't take effect until 2010 and may get eclipsed by  
Congressional legislation. But even so, he says that combined with  
Fishbein's hiring, the Fed's recent activity is "such an enormous  
improvement over what we've had."

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Stephanie Mencimer is the author of "Blocking the Courthouse Door: How  
the Republican Party and Its Corporate Allies Are Taking Away Your  
Right to Sue" (2006)