The Corner

Regulation Rollout

The Geithner-Summers preview of the administration’s regulatory rollout is surprisingly not terrible. Sure, there’s a lot of baloney in there — so-called predatory lending played an insignificant role in the formation of the bubble, as most lenders were betting that rising real-estate prices would give borrowers the ability to at least refinance, if not repay, their loans. But the basic principles are sound, with this important caveat:

NO MORE BAILOUTS.

In Geithner’s first preview of the administration’s proposed regulatory overhaul, he specifically left the window open for Treasury to retain a blank-check authority to bail out firms as an alternative to either receivership or bankruptcy. Republicans should not sign off on any plan that allows Treasury to make loan guarantees, asset purchases, and stock purchases to prevent a firm’s collapse. As Joe Weisenthal points out, the updated plan still creates a troubling amount of moral hazard by leaving open the possibility that the creditors of firms in federal receivership will be made whole as the firms are unwound. That’s bad enough. But giving Treasury what amounts to unlimited TARP authority would be unacceptable.

The administration’s plan is far from perfect. The part about requiring “the originator, sponsor or broker of a securitization to retain a financial interest in its performance” is troubling. The details are missing. How would that work without dramatically shrinking the credit supply? I guess that’s the point, but it seems to me that, as usual, we’re regulating the last crisis. The odds of seeing a return to the kind of no-income, no-asset lending that prevailed during the bubble are pretty slim. However, if you wanted to prevent a similar deterioration in lending standards from occuring in the future, then the best way to do that would be to impose strict mortgage-lending requirements across the board — minimum down payments, higher credit standards for home loans, and limitations on borrowers’ ability to refinance. Of course, this would clash with liberal pieties regarding affordable housing, so the administration would prefer to restrict low-income borrowing indirectly, by requiring mortgage originators to own a piece of every loan.

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