The Role of the Central Bank during the Foreclosure Crisis
December 4th, 2008
The understanding of the role of the Central Bank is pivotal in analyzing the foreclosure crisis so that a rerun does not occur in future. The irony is that changing of rules does not necessarily mean in fundamentals. Edward J.Kane, finance professor from Boston College cryptically remarked that introducing new rules might lead to “regulation-induced innovation.” This is because those who are “being regulated are like termites.” When the wood is being treated with poison they go away for the time being but soon they learn to avoid the poison and “go for the wood” because “they’re intelligent.”
At a roundtable conference eminent pundits all agreed that a foreclosure triggered financial crisis was raging in the housing and banking sectors but none could agree on the remedial measures to be taken not just for now but for the long-term perspective also. The solutions proved to be as challenging as tackling destruction of pesky bugs!
At the conference on financial risk organized by Wharton Financial Institutions Center and Oliver Wyman Institute, the discussions started with William C. Dudley of Federal Bank of New York discussing on the role of the central banks in responding to the foreclosure related crisis leading to market risks and credit crunch.
The federal controls over falling markets have been limited by high provisions for loan losses and write offs on securities. But a way out can be found by allowing banks and securities dealers to directly trade with the feds that will open the way to finance-less liquid collateral. This way the feds can reduce the chances of forced sale of assets with huge discounts from destabilizing the markets.
During the recent foreclosure crisis the feds introduced three new lending programmes. The target was to give the markets what they need most at such time – namely, confidence. Through backup financing the feds hope to give assurance to investors that the banks will not run short of cash.
Robert A Eisenbeis, the chief monetary economist for Cumberland Advisors and formerly of Federal Reserve Bank of Atlanta however was critical about the recent measures taken by the feds. He said these were “essentially stopgap measures and a form of forbearance to give large complicated financial institutions time to recover.” But the crux of the problem was the questionable assets held by the faltering institutions. More oil will not help a sputtering car but what is required is a new engine. He clarified, “I don’t really believe current problems were liquidity problems but solvency problems.”
- Fewer Foreclosures Among Low-cost Brooklyn Homes
- Bank of America is a Lagging Behind in Loan Modifications to Prevent Foreclosures
- The Aftermath of the Housing Boom is Followed by Foreclosure Doom in Homestead
- Lenders Being Legally Challenged for Activating Predatory Lending
- Foreclosures Have Made Life for CEO’s Expensive and Fraught With Fear
- With Foreclosures and Unemployment Continuing it is Doubtful if Recession is Over
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