Fannie Mae-No Politics (FNMA)

[jacklanvo99]

Jacobs and King argue that much of the weak recovery for Main Street was the result of the Federal Reserve being too close to banks. Yet the failures of mortgage refinancing and modification programs directly fell on the Treasury Department. There was more than sufficient room to think boldly there, and the Obama administration failed to act on it. The Federal Reserve was able to get 30-year-mortgage interest rates down to very low numbers; if the administration was interested in fixing the housing crisis, the Fed was already there to help.

Yet there’s a very important initiative Jacobs and King point to as a solution to their concerns: the way Canada regulates its banking system. Canada has large, universal banks, banks much larger than ours in terms of GDP. Yet they haven’t had the problems the United States has had, because their banking regulators are independent of their monetary authority. By separating the two, and having the banking regulators much more accountable, we can tame the financial sector.

There’s a lot to be impressed with in this approach. Certainly the Federal Deposit Insurance Corporation has been aggressive in pushing for financial reform, much more than the Federal Reserve in the wake of the passage of the Dodd-Frank Act. Since it is responsible for covering costs of bank failures through its insurance system, the FDIC’s incentives to be a strict regulator are well aligned. Certainly the pre-crisis era also showed that fragmentation of regulators leads to a regulatory race to the bottom and a less coherent regime.

However, we should be careful about terms of accountability. The notion that the Federal Reserve had been “captured” by financial interests before the crisis is a major theme of the book. This argument is important, yet it deserves pushback. Congress and leaders of both political parties had been creating a deregulatory environment for decades before the crisis, pushing for a presumption of deference to the financial sector.

http://prospect.org/article/bankers-bank