What we are up against
By Scott Sumner
The Great Recession led to a lot of “if only” comments. If only we could charge a negative interest rate on reserves, to discourage banks from hoarding excess reserves. If only we had had more regulation back during the housing boom, so that banks didn’t make all those reckless sub-prime mortgages. If only we hadn’t fed the real estate boom with a policy that held interest rates artificially low via taxpayer backstops of mortgage-backed bonds.
How serious were these regrets? Apparently not at all. One by one we’ve addressed all of these policy issues, and each time we’ve blinked. Let’s start with negative interest on reserves. The Fed says it’s reluctant to go this route because it could make the money market mutual funds insolvent. Almost everyone seems to agree that the MMMF industry needs to change its pricing policy, so that the funds don’t collapse if the market value falls below $1. Unfortunately “everyone” doesn’t have much political clout:
The Securities and Exchange Commission, poised to implement structural changes to money funds in coming months, is expected to broaden an exemption for mom-and-pop retail investors from requirements that certain money funds abandon their signature $1 share price and float in value like other mutual funds, these people said. Supporters of a floating share price argue it would train investors to accept slight fluctuations in the value of their shares and so not panic if they fall below the $1 price.
The revised approach would mark a victory for mutual-fund companies that have pressed the SEC to scale back provisions from a June proposal. It also would deal a blow to other regulators, including 12 regional Federal Reserve Bank presidents, who have argued for tougher rules requiring more funds, including those catering to retail investors, to float share prices. . . .
Such a move is likely to inflame proponents of tougher rules, including former SEC Chairman Mary Schapiro, who led a failed effort to make structural changes to the funds two years ago. Ms. Schapiro last summer criticized the SEC’s approach as insufficient, saying meaningful change should “cover the entire sector” rather than just a narrow segment involving institutional investors. She declined to comment on the new approach until the SEC makes its changes final.
So the MMMF industry has more clout than the unemployed. Is anyone surprised?
With all the complaints back in 2008 about how “deregulation” had led to the housing/banking crisis, you might have expected at least a mild attempt to address the root cause of the excesses–public subsidies encouraging mortgage-backed bonds and subprime mortgages. In fact, Congress is about to pass a law that makes the subsidies explicit, and actually encourages subprime lending. Your tax dollars at work, creating another housing crisis:
A RARE area of agreement about the financial crisis of 2008 is that Fannie Mae and Freddie Mac were at the core of the meltdown and are in urgent need of reform. On March 16th the leading Republican and Democratic members of the key Senate Banking Committee belatedly released a plan for restructuring the two publicly traded mortgage giants.
The plan has received widespread attention in part because it appears to address the most evident problems of Fannie and Freddie and because it is deemed likely to be approved by Congress. Yet neither of these assumptions, on deeper examination, seems to be true.
To satisfy those who want low-priced mortgages on terms that private markets would never endorse, the plan makes explicit the government guarantee on debt which had been implicit for Fannie and Freddie. This would lower the interest rate on high-risk loans, while obscuring the cost of the subsidy. . . .
Opponents of Fannie and Freddie contend that the two played a key role in the crisis by encouraging the issuance of loans with tiny downpayments through a benign-sounding “affordable housing” mandate. Nothing much has changed. Under the new plan, downpayments of as little as 3.5% of the loan value would be permitted. Strewn through the proposed law are words such as “affordable”, “equal access” and “underserved communities”, which suggest that lending decisions will be based on political rather than credit criteria. “The result”, says Edward Pinto of the American Enterprise Institute, a think-tank, “will be risky lending for those least able to cope.”
Next time you hear politicians complain about “deregulation,” just recall how they reacted to the 2008 crisis. There is zero desire in either party to regulate in a way that would inconvenience favored groups like MMMFs, small bankers, real estate salesmen, builders, and home buyers. Too many votes at stake. Instead, complaints about deregulation after a market fiasco are merely empty rhetoric designed to fool the public, earnest NPR listeners, and certain credulous bloggers and pundits. The real action takes place elsewhere, and much later, when no one is even paying attention. The GOP doesn’t want deregulation and the Dems don’t want regulation. Both want to use political power to advance the interest of their favored groups–often shared by both parties.