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Subprime Mortgage Crisis Enabled by Alan Greenspan
Federal Reserve Belatedly Reverses Greenspan and Proposes Tighter Mortgage Rules
Yesterday, Ben Bernanke reversed the Fed's position under Greenspan and proposed tighter mortgage lending rules, stating that " Unfair and deceptive acts and practices hurt not just borrowers and their families but entire communities, and, indeed the economy as a whole. The proposed regulations won't take effect for three months after a public comment period and they don't provide any relief whatsoever for the 3 million homeowners who face foreclosure in the next couple of years. .
Further, mortgage foreclosure counsellors claimed that the proposed rules don't go nearly far enough. For example, pre-payment penalties are not eliminated until after 5 years, thus foreclosing the opportunity for a subprime borrower whose credit improves from re-financing their mortgage at a lower interest rate. Although the regulations may not go far enough, had they been adopted 5 years ago as the housing bubble became evident, they might have prevented or blunted the present crisis. The Fed is proposing to lock the barn door after the horse has been stolen.
Alan Greenspan "Blew It" on Mortgage Crisis
Alan Greenspan's denial of the existence of a housing bubble and his refusal to do anything about shoddy subprime lending practices illustrates the folly of putting a dogmatic libertarian worshipper of Ayn Rand in charge of a key government regulatory agency. Edmund L. Andrews reports in today's NYTimes (12-18-07) that Greenspan ignored repeated warnings on the dangers of subprime mortgages from Federal Reserve governor Edward M. Gramlich nearly seven years ago, in 2001 from senior Treasury Department official, Sheila C. Bair, and from leaders of a housing advocacy group in California, John C. Gamboa and Robert L. Gnaizda who warned that deception was increasing and unscrupulous practices were spreading. "He never gave us a good reason, but he didn't want to do it (press lenders to adopt a voluntary code of conduct). He just wasn't interested."
Greenspan's position was that the benefits of enabling more people to own their own homes outweighed any downside from the deceptive practices. More recently Mr. Greenspan has been on the defensive, stating that the Fed was ill-equipped to investigate lending practices. Here's a link to Edmund Andrews article: