American financial history is a sine curve of excess, crisis and reform. The Crash of 1906 and the Bankers' Panic of 1907 led to the birth of the Federal Reserve System in 1913. The crash of 1929 and related bank failures led to the SEC and FDIC. The S&L meltdowns led to the Office of Thrift Supervision. The Enron and Worldcom bankruptcies led to the Sarbanes-Oxley law of 2002. Now credit laxity has led to the Bankers Panic of 2008. The Fed has responded with lower interest rates and bailouts of overstretched Wall Street firms. How should the Congress and the next president be responding?
1. Support the Credit Cardholders Bill of Rights, HR 5244.
2. Establish a Presidential/Congressional Credit Council. Bring together the regulators (Fed, Comptroller of the Currency, Office of Thrift Supervision, FDIC, SEC, HUD) and representatives of industry, consumers and local government.
3. End Predatory Lending. The North Carolina Predatory Lending Law of 1999 applies to mortgages of $300,000 or less that carry a rate of eight percent above U.S. Treasury debt and prohibits negative amortization, interest-rate increases after a borrower default, balloon payments and other predatory features. It has been praised by three Wharton professors.
4. End SIVs and Require an Annual SEC Report on Derivatives. By enforcing existing bank regulatory laws and FASB principles, end the dangerous Structured Investment Vehicles. Require the SEC to report to the President annually on new forms of risk in credit markets.
5. Encourage the FDIC to Price Risk Fully in Premiums. The FDIC should exercise its latitude aggressively in requiring higher deposit insurance premiums for risky portfolios. Introduce the Basel II bank capital-adequacy guidelines ahead of schedule.
6. Make Basic Financial Education a National Priority. Raise the profile of the Fed's consumer protection activity (Regulation Z under the Home Ownership and Equity Protection Act). Promote state creation of counselors in every city to assist first-time homebuyers or mortgage-holders in default by looking at proposed deals, providing advice and monitoring local credit practices. Every borrower should be given the phone numbers of local credit-counseling services.