Some Blame Fed, With Help From Bush and Congress, for Mortgage and Credit Crunch.
While Treasury Secretary Henry Paulson and some lawmakers want to give the Federal Reserve broader powers to head off financial disasters, the Fed's easy-money policies earlier this decade and years of homeownership incentives dangled by the White House and Congress helped set the stage for today's housing and credit crises.
Housing markets might not have gotten so overheated if the central bank under Alan Greenspan hadn't kept interest rates so low for so long. And Congress -- aided by both Democratic and Republicans administrations -- helped to inflate the housing bubble by loosening financial regulation and enacting policies to promote and reward home ownership.
Fed Chairman Ben Bernanke got mostly praise on Capitol Hill this week for his bold and unorthodox steps last month: engineering the takeover of Wall Street's Bear Stearns by J.P. Morgan Chase, offering to lend hundreds of billions of dollars to investment banks and an aggressive three-quarter percentage point interest rate cut.
But in two days of questioning by congressional panels, Bernanke and other financial regulators drew pointed questions about the Fed's putting U.S. taxpayers at risk for up to $29 billion in the Bear Stearns loan.
"Was this a justified response to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout, as some have called it, while people on Main Street struggle to pay their mortgages?" Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Thursday.
That question still lingers, despite Bernanke's answer that it helped avert a looming financial catastrophe, that the Fed doesn't directly oversee home ownership issues -- a problem he suggested Congress tackle -- and that he did not anticipate losing any taxpayer money on the Bear Stearns deal. Still, he conceded the Fed's actions raised "difficult questions of public policy."
Panels in both the House and the Senate are taking an election-year look at revamping that policy, including the administration's restructuring plan outlined earlier this week by Paulson to give the Fed more authority to protect the stability of the entire financial system. The Fed itself, at least in part, may have to shoulder some of the blame for the fact that so many Americans can no longer afford their homes.
Criticism of Greenspan centers on his endorsement of adjustable-rate mortgages, his resisting calls from some colleagues -- notably fellow Fed member Edward M. Gramlich -- to crack down on subprime home-loan practices and for maintaining low interest rates in the first half of the decade. That included keeping the key federal funds rate at 1 percent for a full year from June 2003 to June 2004, the lowest level since 1958.
It helped make homeownership a tempting prospect for many. As Greenspan began raising rates again in 2004, followed by more increases after Bernanke took over in early 2006, many homeowners found themselves suddenly caught in the closing jaws of tumbling home prices and increasing mortgage payments.
But the White House and Congress also had a hand -- long promoting the glories of home ownership and encouraging more and more Americans to become homeowners. Remember President Bush's "ownership society?" that put heavy emphasis on wider home ownership?
In the 1990s, Congress passed and Democratic President Clinton signed legislation that repealed the Depression-era Glass-Steagall Act. It meant that investment banks, brokerages and insurance companies could compete with traditional banks -- but without facing the same regulations.
Then there is the cherished income-tax exemption that homeowners receive for interest paid on mortgages, whether for a primary residence or a vacation home. As an added incentive, Congress in 1997 expanded the tax break that homeowners can get when they sell their homes, allowing the first $500,000 of a house's appreciation to be exempt from capital-gains taxes. Much earlier, Congress set up government sponsored enterprises -- mortgage-finance giants Fannie Mae and Freddie Mac -- to help funnel money into mortgage markets.
Still, "You have to put the onus to some extent on the Fed in the first place," said economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia. "They raised short-term interest rates far too much a year or two ago, then were too slow in starting to reduce them. Secondly, they were out to lunch on their responsibility for overseeing mortgage markets, particularly for single-family mortgages."
The nation's central bank only started slashing interest rates late last summer, a few months after the economy began to wobble. Since then it has dropped the key rate that it controls a full 3 percentage points from 5.25 percent to 2.25 percent.
David Jones, chief economist at DMJ Advisors and a longtime Fed watcher, agreed that Bernanke "tended to lag behind in dealing with the crisis. But in January, he began to recognize how serious it was. And in his remarks to Congress this week, he minced no words. He has to be given credit for being a fast learner on the job and taking the action that kept us from falling into the abyss in a total credit-market meltdown."
Policy makers may debate how we got into the current financial bind but seem to agree that getting out of it will be take a combined effort "How did we go so wrong?" Greenspan asked in an essay in the Financial Times last month in which he predicted that the financial crisis would be the "most wrenching" in the United States since World War II.
He wrote that it was hard to burst economic bubbles because "Periods of euphoria are very difficult to suppress as they build (and) they will not collapse until the speculative fever breaks on its own."
While Treasury Secretary Henry Paulson and some lawmakers want to give the Federal Reserve broader powers to head off financial disasters, the Fed's easy-money policies earlier this decade and years of homeownership incentives dangled by the White House and Congress helped set the stage for today's housing and credit crises.
Housing markets might not have gotten so overheated if the central bank under Alan Greenspan hadn't kept interest rates so low for so long. And Congress -- aided by both Democratic and Republicans administrations -- helped to inflate the housing bubble by loosening financial regulation and enacting policies to promote and reward home ownership.
Fed Chairman Ben Bernanke got mostly praise on Capitol Hill this week for his bold and unorthodox steps last month: engineering the takeover of Wall Street's Bear Stearns by J.P. Morgan Chase, offering to lend hundreds of billions of dollars to investment banks and an aggressive three-quarter percentage point interest rate cut.
But in two days of questioning by congressional panels, Bernanke and other financial regulators drew pointed questions about the Fed's putting U.S. taxpayers at risk for up to $29 billion in the Bear Stearns loan.
"Was this a justified response to prevent a systemic collapse of financial markets or a $30 billion taxpayer bailout, as some have called it, while people on Main Street struggle to pay their mortgages?" Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Thursday.
That question still lingers, despite Bernanke's answer that it helped avert a looming financial catastrophe, that the Fed doesn't directly oversee home ownership issues -- a problem he suggested Congress tackle -- and that he did not anticipate losing any taxpayer money on the Bear Stearns deal. Still, he conceded the Fed's actions raised "difficult questions of public policy."
Panels in both the House and the Senate are taking an election-year look at revamping that policy, including the administration's restructuring plan outlined earlier this week by Paulson to give the Fed more authority to protect the stability of the entire financial system. The Fed itself, at least in part, may have to shoulder some of the blame for the fact that so many Americans can no longer afford their homes.
Criticism of Greenspan centers on his endorsement of adjustable-rate mortgages, his resisting calls from some colleagues -- notably fellow Fed member Edward M. Gramlich -- to crack down on subprime home-loan practices and for maintaining low interest rates in the first half of the decade. That included keeping the key federal funds rate at 1 percent for a full year from June 2003 to June 2004, the lowest level since 1958.
It helped make homeownership a tempting prospect for many. As Greenspan began raising rates again in 2004, followed by more increases after Bernanke took over in early 2006, many homeowners found themselves suddenly caught in the closing jaws of tumbling home prices and increasing mortgage payments.
But the White House and Congress also had a hand -- long promoting the glories of home ownership and encouraging more and more Americans to become homeowners. Remember President Bush's "ownership society?" that put heavy emphasis on wider home ownership?
In the 1990s, Congress passed and Democratic President Clinton signed legislation that repealed the Depression-era Glass-Steagall Act. It meant that investment banks, brokerages and insurance companies could compete with traditional banks -- but without facing the same regulations.
Then there is the cherished income-tax exemption that homeowners receive for interest paid on mortgages, whether for a primary residence or a vacation home. As an added incentive, Congress in 1997 expanded the tax break that homeowners can get when they sell their homes, allowing the first $500,000 of a house's appreciation to be exempt from capital-gains taxes. Much earlier, Congress set up government sponsored enterprises -- mortgage-finance giants Fannie Mae and Freddie Mac -- to help funnel money into mortgage markets.
Still, "You have to put the onus to some extent on the Fed in the first place," said economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia. "They raised short-term interest rates far too much a year or two ago, then were too slow in starting to reduce them. Secondly, they were out to lunch on their responsibility for overseeing mortgage markets, particularly for single-family mortgages."
The nation's central bank only started slashing interest rates late last summer, a few months after the economy began to wobble. Since then it has dropped the key rate that it controls a full 3 percentage points from 5.25 percent to 2.25 percent.
David Jones, chief economist at DMJ Advisors and a longtime Fed watcher, agreed that Bernanke "tended to lag behind in dealing with the crisis. But in January, he began to recognize how serious it was. And in his remarks to Congress this week, he minced no words. He has to be given credit for being a fast learner on the job and taking the action that kept us from falling into the abyss in a total credit-market meltdown."
Policy makers may debate how we got into the current financial bind but seem to agree that getting out of it will be take a combined effort "How did we go so wrong?" Greenspan asked in an essay in the Financial Times last month in which he predicted that the financial crisis would be the "most wrenching" in the United States since World War II.
He wrote that it was hard to burst economic bubbles because "Periods of euphoria are very difficult to suppress as they build (and) they will not collapse until the speculative fever breaks on its own."
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