In his column today, the New York Times' David Leonhardt takes to task the Federal Reserve and its chairman, Ben Bernanke, for not acknowledging that they inexplicably missed the housing bubble, and questions the Fed's ability to spot future bubbles. In the wake of Bernanke's speech this weekend in which he deflected blame for the crisis and instead pointed to lax regulation as the culprit, Leonhardt rightly notes, as many others have, the numerous occasions in the lead-up to the crisis when Bernanke and his predecessor, Alan Greenspan, rejected the idea of a housing meltdown and the broader crisis to follow. Like Bernanke saying "We've never had a decline in house prices on a nationwide basis" in 2005, or that Fed officials "do not expect significant spillovers from the subprime market to the rest of the economy" in 2007. Ouch.
Still, near the end of his column, Leonhardt begrudgingly concedes that the Fed "does seem to be the best agency to regulate financial firms." Say it ain't so, Dave.
Leonhardt, I reckon, lets the Fed off far too easily. The Fed didn't just miss the bubble and all its warning signs; it actively ignored them, especially when it came to protecting consumers. As our own Kevin Drum writes in his monster feature on the Big Finance lobby, "the Fed ignored years of pleading from community groups to do something about abusive mortgage lending." That’s a reference to the Washington Post's stellar reporting on how Fed officials turned a blind eye to the repeated pleas of community groups to rein in abusive lending practices—the kinds of predatory lending that precipitated the crisis:
[D]uring the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies. …
Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.
The Post article mentions that the Fed has since tried to take a proactive stance on consumer protection, but it's clearly too little too late. And if history is any example, promises of better regulation and greater scrutiny only fade with time, and it wouldn't be surprising to see the Fed revert back to the way it was before the housing meltdown. All of which is to say, no matter how much Ben Bernanke believes the Fed is still the right regulator for the job, we're better off giving that power to a consumer financial protection agency.