Page 2 of 2

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

Some Fed-watchers suspect that recent criticism of the institution has sunk in. Dan Immergluck, an associate professor of city planning at the Georgia Institute of Technology who has worked with the Fed, sees "an awakening" in the institution that for most of its history has been dominated by neoclassical economists who have viewed consumer protection as incompatible with the Fed's role of ensuring the safety and soundness of the banking system. As proof, he points to the Fed's response to a campaign last year by conservatives and mortgage industry officials to blame the Community Reinvestment Act for the foreclosure crisis—implying that the law, designed to combat racial discrimination in mortgage lending, had caused the meltdown. Immergluck says that the Fed governors forcefully disputed that notion, even posting research on the agency website to counter these claims.

Immergluck says the CRA also came under attack in the late 1990s, by conservatives like former Texas Senator Phil Gramm, when Congress was deregulating the banking system. Back then, when Greenspan was the Fed chairman, the institution never defended the law or corrected the record when critics misconstrued it, Immergluck says. He and other Fed-watchers attribute the change in tone and the Fed's new consumer protection focus to two things: the financial crisis, which laid waste to much of the conventional wisdom surrounding regulation of the banking sector, and a change in leadership. While Ben Bernanke has been harshly criticized for his handling of the bailout, consumer advocates say that he has ushered in a sea change at an agency that was headed for so long by Greenspan, a libertarian whose idea of consumer protection was tinkering with mortgage disclosure forms.

For years, the only real input consumers had on Fed policymaking came through involvement on the Fed's Consumer Advisory Council, a group that meets three times a year and provides feedback to the Fed governors. As many advocates are quick to point out, much of the council is made up of credit card industry officials. Another chunk consists of representatives of community development groups that are clients of the Fed. Only a handful of council members are what you'd think of as traditional consumer representatives.

Greg Squires, a professor of sociology, public policy, and public administration at George Washington University, served on the council from 1996 to 1998, during the Greenspan years. "We were there primarily to provide cover for the Fed so they could say they heard from consumer folks," he says, adding that Fed officials never really considered any of the council's recommendations, even after they had spent months drafting them.

Kathleen Keest, an attorney with the Center for Responsible Lending who also served on the consumer advisory council in the early 1990s, says that the Fed never wanted the consumer protection role Congress empowered it with. Fed economists have tended to regard consumer protection regulations as a drag on the market, she says, so consumers have always been second-class citizens in the Fed's eyes.

Keest says that the Fed has largely followed the advice of bankers, who have long argued that any sort of regulation of the market would lead to a reduction in access to credit. Now that the financial crisis has shown the opposite to be the case, Keest says that Fed officials have become slightly more willing to listen to the concerns of consumers. She says that the Fed is starting to realize that consumer protection is an important component of protecting the safety and soundness of the nation's banks.

Hence the hiring of Fishbein, who will presumably advise Fed officials from a more grassroots perspective and flag potential threats to the financial system before they go critical. Rheingold says the changes are baby steps; the credit card regulations are, for instance, "too little, too late" in part because they don't take effect until 2010 and may get eclipsed by congressional legislation. But even so, he says that combined with Fishbein's hiring, the Fed's recent activity is "such an enormous improvement over what we've had."

Photo courtesy the Federal Reserve.

Page 2 of 2