Remebering Ed Gramlich

Rescued from the bin: jaded as I am from the Wall Street Journal's blather about how the whole housing mess is all the fault of Jimmy Carter and those other evil Democrats who seduced honest and responsible bankers out of the paths of righteousness, it is refereshing to run across this item from the same Wall Street Journal in 2007, chronicling the career of the late Ed Gramlich:

Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to [Fed Chairman Alan] Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.

"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.

Greenspan's Response

Mr. Greenspan, in an interview, says he doesn't recall a specific discussion of the idea but confirmed his opposition to it.

There is "a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong," says Mr. Greenspan, who retired in February last year. "For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credits."

Mr. Greenspan adds that borrowers might get a false sense of security from a lender that advertised itself as Fed-inspected. . . .

On June 29 [2007], the Urban Institute will release a book by Mr. Gramlich, "Subprime Mortgages: America's Latest Boom and Bust." [Link--Buce] It argues, among other points, that all lenders affiliated with banks and thrifts could "be brought under the same supervisory conventions as their parents seemingly without major culture shock." It wouldn't be a huge undertaking by policy makers, and it would lead to more uniform, stringent practices.
[Edward Gramlich]

Mr. Gramlich, who is being treated for cancer, says, "There are certain things that unsupervised lenders do that a Fed supervisor would not let you get away with," such as not escrowing taxes and insurance, not verifying an applicant's stated income, or assessing the borrower's ability to repay based on an introductory "teaser" rate. But he said the proposal's reach would have been limited by the fact that many lenders would still have no federal supervision. . . .

[T] Fed generally leaves regulation of nationally chartered banks to the Office of the Comptroller of the Currency; of securities-dealer units to the Securities and Exchange Commission; and of consumer-finance companies to the states.

However, state regulation is generally considered inconsistent and usually less rigorous than federal oversight. Moreover, 18 states offer some form of exemption from state regulation to bank holding company units, according to the Conference of State Banking Supervisors.

The Fed periodically examines the finance-company units to ensure that they pose no threat to the "safety and soundness" of their deposit-taking affiliates and to assess their controls for things like money laundering. In special situations, it does scrutinize their practices for compliance with consumer-protection laws. In 2004, it fined Citigroup $70 million for alleged abuses by its CitiFinancial unit.

But Mr. Gramlich fretted that extending those standards to holding-company units would create an unlevel playing field unless stand-alone lenders were subjected to the same thing.

Jim Strother, general counsel for Wells Fargo & Co., said oversight of bank holding company units isn't "where the need is," noting the Fed does examine Wells Fargo Financial, a major subprime mortgage lender. "The gap is for companies that aren't in the banking system at all."

Ed Gramlich died of Lukemia on September 5, 2007. The WSJ piece is by Greg Ip, formerly the Journal's Fed-watcher, and one of the best.

Friedman on the Two Greenspans

Benjamin M. Friedman, reviewing the new memoir by former Fed Chairman Alan Greenspan, notes a remarkable disconnection—rather, two remarkable disconnections, one in policy, one in practice. First, Friedman marvels over how much Greenspan’s conduct as chair belies his own philosophy:

Greenspan continually reiterated his belief in the power of private economic activity organized in free, competitive markets. Government interference, therefore, is for him mostly a bad idea. It was, he writes, “the embrace of free-market capitalism,” not monetary policy, that “helped bring inflation to quiescence.” Further, in his view, free markets are not only efficient but robust. In the face of disturbances—higher oil prices, say, or a decline in either consumer or business confidence—they tend to correct themselves. “If the story of the past quarter of a century has a one-line plot summary,” he writes, “it is the rediscovery of the power of market capitalism.”

And yet, as Friedman comments:

This mantra is strikingly at odds with Greenspan’s account of what he and his colleagues did during his years at the Federal Reserve. They took corrective action, gave advice and even instructions, and took the initiative in anticipating the difficulties markets might face. They did so not just in the immediate aftermath of the September 11 atrocities, which anyone would recognize as out of the ordinary, but in one episode after another throughout his years at the Federal Reserve. Familiar examples include the 1987 sock market crash; the wave of financial problems in many Asian and Latin American countries beginning in 1997; the near collapse of the LTCM hedge fund in 1998; the passage of the millennium from 1999 to 2000 (which many people feared would trigger widespread "Y2K” computer glitches); and many others.

In dealing with such events Greenspan and his colleagues treated financial markets more as delicate flowers requiring careful attention and nursing. Similarly, although he frequently makes clear in what he writes that he rejects Keynesian economics, both at the Federal Reserve and during his time in the Ford White House he consistently advocated Keynesian stimulus (through tax rebates or lower tax rtes) whenever he thought the economy needed a boost.

But Friedman goes on to demonstrate that there was one province to which Greenspan’s interventionist writ did not run: subprime loans. He contrasts Greenspan’s own attitude to the attitude of his fellow governor, the late Edward Gramlich. It was Gramlich who worked tirelessly to highlight the risks in subprime lending, and to lobby for reform. Greenspan wasn’t buying. His “opposition to such proposals,” Friedman declares

Was consistent with the admiration that he expresses for unfettered markets ane the sanctity with which he regards property rights … For Greenspan, recognition that the workings of such markets sometimes destroy asset values, jobs, or even entire industries is still not ground for interference in the economy in the aggregate, or with individual transactions to which two or more private parties voluntarily agree.

“In hindsight,” Friedman concludes:

One wishes that Alan Greenspan, as Federal Reserve chairman, had clung to his economic philosophy in regulatory matters no more closely than he did in his hands-on conduct of monetary policy.

Indeed.

Source: Friedman, “Chairman Greenspan’s Legacy,” New York Review of Books March 20, 2008, 25-28.