The Fed continues to be grilled over whether it caused the mortgage meltdown via low interest rates, or allowed it via lax bank supervision. Here's the latest: Fed Transcripts Stoke Debate on Rates - NYTimes.com.
So what's the answer? They allowed it via lax bank supervision. Those insisting the Fed caused the mortgage meltdown via encouraging low short-term interest rates don't understand (or don't want the public to understand) basic macroeconomics, and like to imply that the Fed has more influence on mortgage rates than it does.
These are the interventionists, ever wishing greater taxation and higher interest rates upon the American economy until it slows to a virtual stop under the weight of excessive regulation and complete disreliance on market forces. Again, a policy usually couched in verbiage suggesting a need for greater control that belies their actual intent: more dependence on government, less freedom.
The actual truth, take if from a long time banker and bank consultant (in my earlier life), is that regardless of rates, the meltdown could have been largely averted, or at least substantially mitigated, with more stringent supervision of lending and securitization standards. Then why did banks forget how to lend?
The problem is that lenders had been ordered by the federal government - - for reasons of politics, not sound economics - - to relax their lending standards in order to make loans available to more of the populace. And that's exactly what they did. But banks couldn't afford to keep loosely-granted loans on their own balance sheets. So they sold them off to greater fools.
Could the Fed really have attenuated the hysteria in mortgage lending? Yes, if they had been allowed to do so. But those grilling them in the current rounds of post mortem analysis were largely behind the executve and legislative mandates that prevented them from doing so. Bit of a conflict, wouldn't you say? - David
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