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The Vault2020-07-14T15:00:29-04:00

Karen Petrou: An Easy Way to Turn Home Loan Banks into Equality Banks

Next week, FHFA will kick off its important new full-scope review of the Home Loan Bank System with a belated assessment of a $1 trillion-plus GSE that has quietly basked in the long shadow cast by its even larger siblings, Fannie Mae and Freddie Mac.  Their history tells the sorry tale of GSEs allowed too long to evade careful scrutiny and a tightly-confined mission.  Another once-upon-a-time GSE, Sallie Mae, tells a different tale, this time of ill-designed privatization.  These are hard lessons but doing nothing is even worse.  If FHFA avoids the pitfalls of letting too much pass it by or rushing to ill-conceived reform, then modernizing the Home Loan Bank System could be a boon to economic equality – a meaningful mission and then some.

As a sweeping, caustic study has shown, the System’s seclusion has allowed it to escape anything akin to modern prudential safeguards or standards ensuring mission adherence and taxpayer protections.  These gaping flaws must be quickly repaired, but the System must be saved not so much for its members, but for what it could deliver if allowed to serve its full potential.

Going back two decades, rules still in full force allowed Home Loan Banks to hold “acquired member assets” (AMA).  This is an artifact of an ill-starred effort by the Chicago FHLB to challenge Fannie and Freddie in the secondary mortgage market.  It ended in considerable losses to all Home Loan Banks that tried to be mortgage-finance “partners.”  However, the AMA rules go farther and thus could do considerably better.

The AMA standards derive from the System’s pre-FHFA regulator, the Federal Housing Finance Board (FHFB).  It decided that the System’s mission was not just backing member mortgage finance, but also creating “thriving and liable communities.”  Heads up, FHFA!

The rules allowed the Banks to […]

September 19th, 2022|

Karen Petrou: When Crypto Arrogance is Criminal Contempt

Bankers are often said to live in isolated splendor.  There’s truth to this, but banker insularity is nothing compared to the astonishing effrontery of cryptoasset executives who think their self-assured brilliance puts them above not just the law, but even concern for the public good.  Nothing argues more compellingly for immediate, stringent crypto regulation than the outrage with which crypto companies have greeted Treasury’s demands – request failed to work – that they cease facilitating the kind of dark-money transactions that fund Russian war crimes, North Korean nuclear-obliteration threats, and webs of human trafficking, narcotics smuggling, and general evil around the world.  These companies clearly cannot govern themselves and they must thus be quickly and sharply made to do so for everyone else.

What brought this issue to a head is the self-righteous fury with which crypto companies view Treasury’s efforts to make them comply with the same sanctions rules demanded of anyone dealing in any other form of money.  Somehow, money in digital form is money that can do no wrong because, we are told, those who use crypto-currency – apparently unlike users of any other form of a medium of exchange — have a right to do so as they wish.

This omnipotent perspective is clearly evident in last week’s Coinbase suit against the U.S. Treasury on grounds that sanctioning a crypto “mixer”, Tornado Cash, trampled on so many First Amendment rights that press stories giving its side of the case had space only to list a few.  Crypto mixers such as Tornado Cash essentially obscure transaction origins so no one knows who is sending how much to whom for what.  The Washington Post quotes Coinbase’s chief legal officer saying that Coinbase employees (the suit’s lead plaintiffs) use Tornado Cash for saintly purposes such as giving away money and […]

September 12th, 2022|

FedFin: The Big Squeeze

Reinforcing the sharp turn-around in housing markets evident since the Fed surprised markets with its first 75 bps hike, a new working paper from the San Francisco Fed provides the first hard evidence of how monetary-policy shocks in the U.S. hit listing prices hard and fast….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

September 7th, 2022|

FedFin on: Centenarians Get a Face Lift

As seems always the case, FHFA Director Thompson is as good as her word to Congress earlier this summer, announcing yesterday a review of the extent to which the Home Loan Banks and their System meet the mission assigned to them and, regardless, if that mission still makes sense. Building on our initial assessment of FHFA’s plans, we here turn to what the System, its allies, and reformers are likely to say and what FHFA and/or Congress will then do about it.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

September 1st, 2022|

FedFin on: The No-Down Low-Down

BofA’s new no-down payment mortgage is another innovative product in which banks use their balance sheets to address their CRA obligations by offering down payment assistance or, as here, flat out nothing down.  The extent to which nonbanks can match these programs depends on the extent to which Fannie and Freddie are able and then willing to cross-subsidize ….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

August 30th, 2022|

Karen Petrou: Why Failing to Focus on Economic Equality Flummoxes Fed Policy

August doldrums always seem to power up spirals of will-he or won’t-he speculation about the Fed’s Jackson Hole meeting because there usually isn’t all that much else to talk about economically-speaking. This year is different because this year has revealed the Fed as a central bank without a compass at a time of extraordinarily strong winds towards the rocks.  Still, in all the punditry over whether the Fed can somehow maneuver to Jay Powell’s “softish landing,” there’s one missing, critical factor:  inequality and what the Fed must do about it or, if it won’t, what we must do about the Fed.

The Fed is fond of blaming fiscal policy for economic inequality, but U.S. fiscal policy has been awesomely stimulative since the pandemic struck and the U.S. has still grown ever more unequal in terms of both income and wealth.  This is because ultra-accommodative monetary policy stokes inequality and, at the scale practiced by the Federal Reserve, towers over even trillions of fiscal stimulus.  As a result, the U.S. didn’t get the Fed’s promise of “robust growth” accompanied by only a bit of “transitory” inflation.  Of course, we instead got a crushing combination of high-flying inflation that will leave long-lasting scars on vulnerable households even if it meaningfully abates as some now hope.

The Fed thinks itself aloof from any inequality accountability because it cloaks itself in the mantle of “maximum employment” as armor against any inequality-effect assertions.  It was in fact this focus solely on employment that led the Fed to bless its 2020 policy shift to “flexible average inflation targeting” (FAIT) as a pro-equality policy shift.

But, employment as the Fed chooses to measure it is as mirage.  As one of the latest assessments of central banking and inequality again makes clear, it is critical to assess […]

August 29th, 2022|
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