Friday, June 19, 2009

Dallas Fed On Curbing Irresponsible Lending

In yet another splinter approach from the route espoused by Bernanke, the Dallas Fed shares its thoughts on limiting irresponsible lending. The Fed's solution is the imposition of loan-to-value caps which would make a lot of sense, but would substantially curb loan demand - a course of action that the Federal Reserve would fight tooth and nail against in its attempt to deflate debt by a new wave of excess (and even more irresponsible as it would be taxpayer backstopped) lending. The Dallas Fed's justification:
A maximum loan-to-value ratio would create a cushion of borrower equity—the excess of collateral value above loan amount—available to lenders in the event of default. In addition, borrowers would face the prospect of losing their equity, making them more likely to apply only for loans they were reasonably sure to repay. By promoting such conservatism, loan-to-value regulation would guard against the speculative borrowing that leads to credit booms.
While this proposal has about a snowball's chance in hell of ever being effectuated under Bernanke, and about a million times less under successor Summers, the take home message is the ever increasing "vigilantism" by regional Feds in their attempts to bring rationality to the system hell bent on repeating the excesses of the past credit bubble. At what point will the Bernanke vs Everyone dynamic become unsustainable? Will another major market crash be sufficient to shift the balance of power away from Bernanke to the likes of Yellen, Lockhart et al?

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