Testifying before the House Financial Services Committee today, Ben Bernanke allowed that the mortgage lending industry could probably do with a a few more rules:
We are looking closely at some mortgage lending practices, including prepayment penalties, escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower’s ability to repay.
This represents a big shift. During his 18 years in charge, Alan Greenspan seemed pretty uninterested in the Federal Reserve’s role in regulating the banking industry. Regulation interfered with the magic of free markets, his reasoning went. Plus (I’m making a guess here) he probably thought it was pretty boring.
Greenspan didn’t have a problem with the Fed’s regulation of interest rates, of course, but interest rate policy is a less intrusive, easier-to-reverse (not to mention more glamorous) way of affecting behavior than laws and regulations. It’s also an extremely blunt instrument, though, which was why Greenspan said he was reluctant to use it to pop possible investment bubbles.
But it’s at least conceivable that regulations aimed at reining in particularly short-sighted market practices could temper the rise of bubbles–as well as protect some consumers from their consequences. Which appears to be what Bernanke is thinking.