By Steven K. Beckner
Columbia University Professor Charles Calomiris cited a number of
ways in which government regulations are thwarting the Fed’s effort to
expand credit and stimulate economic growth in an interview.
Because risk-based capital standards require banks to hold less
capital against Treasury securities than against loans, he said, “banks
won’t have to allocate as much capital on their balance sheets if
they’re not making loans.” Plus, “there is a lot of uncertainty about
what the capital requirements will be.”
Calomiris, a member of the Shadow Open Market Committee, also said
“banks are turning down deposits” like never before as part of their
effort to meet higher capital requirements.
The Fed’s zero rate policy might seem to assist banks in improving
their balance sheets and building their capital, but Calomiris contended
it may be having the opposite effect. With the federal funds rate and
other short-term interest rates near zero, he said banks have little
incentive to attract deposits because they can borrow funds at very low
rates without having to pay the transaction costs of dealing with
depositors and meet reserve requirements.
“Banks are basically telling people, ‘don’t bring us your money,”
he said, adding, “if this persists for a long time, banks will invest
much less in customer relationships.” And he said that “hurts the
lending channel of monetary policy.”
So the zero rate monetary policy “is likely to have very little
effect on lending for the foreseeable future,” Calomiris said.
Calomiris also alleged that new credit card regulations, designed
to protect card holders, are curbing consumer credit growth. And he said
Dodd-Frank disincentivizes mortgage lending in various ways. For
instance, he said a customer who can’t make payments on a mortgage loan
can claim that the lender should not have made him the loan as “a
defense against foreclosure.”
But Dodd-Frank is only one aspect of government policy that is
constricting mortgage credit and keeping the housing market in the
doldrums.
The dearth of mortgage lending so concerned Bernanke that in
January he sent Congress a Fed staff-written “white paper” which said
“the ongoing problems in the U.S. housing market continue to impede the
economic recovery.”
The white paper blamed “the extraordinary problems plaguing the
housing market” in part on “a marked and potentially long-term downshift
in the supply of mortgage credit.” And it blamed that “downshift” in
turn on the tightening of mortgage underwriting standards by the
government sponsored enterprises Fannie Mae and Freddie Mac.
Fannie and Freddie, which came to dominate housing finance in the
years leading up the crisis with the help of federal subsidies and which
securitized many of the mortgages that went sour in 2007, “hold or
guarantee significant shares of delinquent mortgages and foreclosed
properties,” the Fed report said.
Since September 2008, the GSEs have operated in federal
conservatorship and have taken steps to “minimize losses for taxpayers,”
noted the white paper, which went on to suggest that they may have gone
too far in that direction.
“In many of the policy areas discussed in this paper — such as
loan modifications, mortgage refinancing, and the disposition of
foreclosed properties — there is bound to be some tension between
minimizing the GSEs’ near-term losses and risk exposure and taking
actions that might promote a faster recovery in the housing market,”
the Fed document said. “Nonetheless, some actions that cause greater
losses to be sustained by the GSEs in the near term might be in the
interest of taxpayers to pursue if those actions result in a quicker and
more vigorous economic recovery.”
“Mortgage lending standards were lax, at best, in the years before
the house price peak, and some tightening relative to pre-crisis
practices was necessary and appropriate,” the white paper went on.
“Nonetheless, the extraordinarily tight standards that currently prevail
reflect, in part, obstacles that limit or prevent lending to
creditworthy borrowers.”
The Fed said the GSEs have imposed “stricter underwriting, higher
fees and interest rates, more-stringent documentation requirements,
larger required down payments, stricter appraisal standards, and fewer
available mortgage products.”
Bank of America chief economist Mickey Levy told MNI that, as a
result, “the mortgage market is just dysfunctional … even though
mortgage rates are really low now, and this is obviously beyond the
Fed’s control.”
Because banks invariably need to sell their mortgage loans to
Fannie or Freddie, they must meet their new demands, and Levy said bank
mortgage originations have dried up because the GSE’s documentation
requirements are “so onerous now” that they are pushing up
administrative costs and causing big delays between origination and loan
settlement.
Wells Fargo chief economist John Silvia says government programs
designed to help homeowners facing foreclosure have only compounded the
problem.
Asked at an Atlanta Fed conference whether additional programs
should be implemented to revive the depressed housing market, Silvia
asserted, “No. In fact, it’s counterproductive.”
“There are too many mortgage plans,” he said. “You’ve got to
stop … . The problem with housing is that you’re always changing the
rules. … You (the lender) can’t figure out what your return is going
to be.”
The larger issue is a government policy that pre-dated and, in many
minds, helped cause the financial crisis — the practice of considering
certain large financial institutions “too big to fail” (TBTF). Because
of the accurate perception that the government would bail out the
biggest banks, they were able to borrow at lower cost and thereby grow
even larger while taking bigger risks.
Rosenblum says “TBTF banks remain at the epicenter of the
foreclosure mess and the backlog of toxic assets standing in the way of
a housing revival.”
“Ensuring that banks have adequate capital is essential to
effective monetary policy,” he writes, because “banks must have healthy
capital ratios to expand lending and absorb losses that normally occur.
Repairing the damaged mechanism through which monetary policy impacts
the economy will be the key to accelerating positive feedbacks.”
But that process is taking a long time, and Rosenblum says “the
sluggish recovery is a cost of the long delay in establishing the new
standards for bank capital.”
“Given the urgent need to restore economic growth and a healthy job
market, the guiding principles for bank capital regulation should be:
codify and clarify, quickly,” he argues. “There is no statutory mandate
to write hundreds of pages of regulations and hundreds more pages of
commentary and interpretation. Millions of jobs hang in the balance.”
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** MNI **
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