Now You See it, Now You Don't: The Bush Administration's Federal Reserve Shell Game

by Jeff Siegel

The first rule in dealing with the Bush administration: Pat for your wallet. We invaded Iraq to stop the spread of weapons of mass destruction, and there weren't any. Brownie did a heckuva job in New Orleans during Katrina, and much of the city still looks like it has been bombed out.

So when the Bushies tell us they're going to give the Federal Reserve awesome new super powers to police the financial markets, we can immediately assume that their plan has nothing to do with policing the financial markets. Because, as Treasury Secretary Henry Paulson put it, "Government has a responsibility to make sure our financial system is regulated effectively."

Which, as Princeton economist Paul Krugman explained, is the administration's way of "creating the appearance of responding to the current crisis, without actually doing anything substantive."

The key word in all of this is effective. The rest of us might see effective as preventing the collapse of the U.S. mortgage lending system, but this is not how the Bushies see it. Rather, it's part of their scheme to free the financial system from traditional regulatory shackles. They want to give the Federal Reserve, a more or less autonomous branch of the government that is mostly unencumbered by Congressional oversight, the mandate to keep an eye on Wall Street. This, is, of course, the traditional role of the Securities and Exchange Commission (SEC), which is subject to Congressional oversight. In other words, Congress can tell the SEC what to do, and does so regularly. On the other hand, it usually does not tell the Fed what to do, preferring to treat the central bank as some kind of mystic wonder. We get bills to reform the SEC all the time; I can't ever remember a bill telling the Fed to loosen or tighten or do whatever to monetary policy.

The other bit about this that one needs to pay attention to? The provision that would give a federal panel oversight of state mortgage laws. This may seem innocent enough, but it is far more devious. State mortgage laws are sometimes more strict than their federal counterparts, and the administration has been working for years to take away the various states' powers to do just that. So, here, in the guise of reform, they accomplish one of their main goals.

Somewhere, Heckuva Job Brownie is smiling. He may be gone, but his spirit lives on.

(The photo of the New York Stock Exchange is by fluzo of Madrid, Spain via Flickr, using a Creative Commons License.)

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home buyer said...

A few months ago, my wife and I refinanced our home loan from 5 7/8 to 4 5/8. We also added money to the pot to get it down to conforming. We'll recoup the difference in a few years from the reduced mortgage payment.

We had enough cash on hand to actually pay the house off, but I'm doing way better in the stock market than the 4-5/8's rate we have. Also, we needed the cash to make a down payment on a second home, where my in-laws will be living, and to put enough into a bond fund to make the second home's mortgage payment.

As far as real estate taxes, I voted for Prop 13 in CA umpteen years ago. Its kept our property taxes down, and thus state spending down. Without it, I'm not sure anyone could afford to live in CA. (Renters pay property taxes in the form of higher rents.)

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