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The Fed Awakens

The Federal Reserve had the power to protect consumers. Until now, it just chose not to use it.

| Thu Jan. 29, 2009 6:33 PM EST | Scheduled to publish Thu Jan. 29, 2009 6:33 PM EST

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 subprime 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.

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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 credit card companies. Among other things, the rules require credit card 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. Credit card 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 credit card regs were more the result of congressional pressure than innovation by the Fed. 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 Fed, of course, isn't saying as much, the reason for its unusual hire isn't hard to intuit. For one, the Fed totally whiffed on preventing the subprime lending meltdown. 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 subprime lending market.

It's not that the Fed 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 subprime lending by banks and other financial institutions. That law gave the Federal Reserve 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 subprime industry had imploded.

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