The supporters of Larry Summers drive to be Fed chair are desperately trying to rewrite history so that this world class champion of financial deregulation was actually a prescient supporter of tighter regulation all along. Exhibit A in this historical rewriting is a report on predatory lending that the Department of Housing and Urban Development (HUD) and the Treasury Department put out in 2000, when Summers was Treasury Secretary. The report is featured as an example of Summers’ commitment to regulation in a NYT article comparing Larry Summers’ and Janet Yellen’s record on regulation.
The report contains many sound recommendations about requiring lenders to better disclose terms of loans, limiting loan flipping, and sharply restricting the use of prepayment penalties. The article tells readers:
“The report recommended modest changes in federal law but Congress, then controlled by Republicans, made none. The Fed and other banking regulators also ignored the findings.”
If readers are unfamiliar with this history of Larry Summers as a crusader for regulations protecting consumers, they can be forgiven. Summers was apparently unable to get even a single mention for this report in the New York Times in the month it was issued. Furthermore, it is inaccurate to imply that the report was a major departure from views held at the time by all Republicans or even Federal Reserve Board Chairman Alan Greenspan.
A NYT article from April 2, 2000 began by telling readers:
“After several years of inaction, pressure is building in Washington to impose tighter rules on banks and finance companies that specialize in lending money to homeowners with blemished credit records.
“Representative Jim Leach, the Iowa Republican who is chairman of the House Banking Committee, said last week that his committee would be pressing for more vigorous enforcement of a law adopted in 1994 to combat deceptive lending practices, and may do more.”
Later the piece added:
“all four federal banking regulators — including Alan Greenspan, chairman of the Federal Reserve — had spoken out against deceptive lending practices, and some are beginning to develop new regulations.”
The piece then goes on to cite comments from Franklin Raines, then the CEO of Fannie Mae, about cutting off access to funds to abusive lenders. It then tells readers;
“Wall Street, where Fannie Mae is a formidable voice, is also sensitive to the views of Mr. Greenspan. And he, too, recently condemned predatory lending practices.
“‘Although markets have ‘vastly expanded credit to virtually all income classes,’ Mr. Greenspan said in a speech on March 22, he was concerned about ‘abusive lending practices that target specific neighborhoods or vulnerable segments of the population.’
“The Fed has formed a multiagency study group to explore ways to address predatory lending, aides to Mr. Greenspan said.”
In short the report that the Treasury Department co-authored with HUD under Summers leadership was largely repeating warnings that even the arch-deregulators were also making at the same time. He apparently did not view the issue as important enough to draw even minimal press attention to the report.
The article also notes Summers’ role in stifling Brooksley Born’s effort to regulate derivatives as head of the Commodities and Futures Trading Commission. It reports the defense of Summers’ allies:
“But he and his supporters have maintained that the failure occurred because the use of derivatives changed over a decade in ways that they did not anticipate.”
Actually, the idea that derivatives could pose a threat to financial stability should not have been a surprise to sentient beings even in the late 1990s. Alan Greenspan said that he felt it was necessary for the Fed to intervene in the collapse of Long-Term Capital Management in September of 1998 in order to preserve the stability of financial markets. Long-Term Capital had been heavily involved in derivative markets at the time, which should have provided some hint as to ability to create instability for the financial system.