If you read Stern’s speech, he wasn’t merely discouraging “draconian regulatory overreaction,” he was discouraging anything more than token action. He urged policymakers to be “extraordinarily careful in addressing perceived inadequacies in the current environment.”

Perceived inadequacies? He is taking the position that nothing is wrong. That says he thinks virtually no change is warranted, and the rest of his speech supports that view.

As to Fed actions, you make an interesting point. I looked on the FFIEC website. The only press release that had “subprime” in the short description was January 3, 2003:

The Federal Financial Institutions Examination Council (Council) announced today that the four federal banking agencies have decided not to proceed with a proposal to collect data on subprime consumer lending programs in the quarterly regulatory reports filed by banks and savings associations.

So it appears that the FFIEC does not regard these new policies to be significant enough to merit being highlighted in a press release. By contrast, quite a few actions relative to Hurricane Katrina were featured.

If you have something that suggests otherwise, please send a link. I would like to see what the changes were.

For better or worse, my view has been colored by the fact that the Fed got chewed out before Congress to use its powers under HOEPA to rein in subprime activity among the banks it regulates (by contrast, the OCC did) and that Bernanke’s response to this snowballing credit crisis has been to think solely about monetary policy, and not to consider regulatory remedies (in my view, small changes are not going to have much impact).

You might also look at a post about a conversation I had with the Fed official who prepped Roger Cole for his testimony before Congress. I had been pretty sympathetic to the Fed prior to that.

And considering the five or so regulatory guidances on subprime lending that FRB has issued through its role on the Federal Financial Institutions Examination Council I’m not sure its strictly accurate to say the Fed has done nothing in regard to the subprime lending crisis.

The Fed’s culpability is even worse than the mortgage lenders and Wall Street scams artists. The Fed knew what the problems were, had a responsibility, but did not stop the shenanigans.

Enron was peanuts. Enron was a misdemeanor compared to this felony.

The “perps”: the Fed and federal regulatory agencies; the mortgage industry; the money center and Wall Street banks and brokerages; and the ratings agencies. The entire mob needs to face justice.
Nothing short of major federal prosecutions and trials, Congressional investigations, new legislation and regulation, and the firing of all the guilty bank/brokerage/mortgage/federal officers will restore public confidence.

“Gary Stern became president and chief executive officer of the Federal Reserve Bank of Minneapolis in March 1985. Stern, a native of Wisconsin, joined the Federal Reserve Bank of Minneapolis in January 1982 as senior vice president and director of research. Before joining the Minneapolis Fed, Stern was a partner in a New York-based economic consulting firm. Stern’s prior experience includes seven years at the Federal Reserve Bank of New York.”

Minneapolis Federal Reserve Bank
Background on Gary H. Stern
http://minneapolisfed.org/info/mpls/people/stern.cfm

Or, to quote Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

But this part of Stern’s bio is particularly droll, under the circumstances:

“Stern is co-author of Too Big to Fail: The Hazards of Bank Bailouts, published by The Brookings Institution (2004).”

It’s may be a screwed up system, but it’s still a great entertainment value for the money.

I like this dichotomy, and I think the correct conclusion is that the person who makes and vets the loan needs to hold the loan on its balance sheet. He’s the one with the information; if he doesn’t get the loan, he’s going to be able to take advantage of someone else with less information.

You are right in noting “cutting short term rates to 1%, which was a negative real interest rate. Negative real interest rate produce speculation.” You have identified the correct technical connection between the central bank actions and consequences. It’s interest rates – not liquidity.

Central banks may be wrong in their current thinking about the severity of the consequences, but most commentators are wrong in describing the central bank role. This may seem like nitpicking, but it’s fairly fundamental, and doesn’t add credibility to either side of the argument. Your distinction pointing to interest rates is quite important. At least from that starting point, there might be a more meaningful discussion and understanding of the origin of the problem, and the Fed would be hard pressed to win that argument.

“Iceberg? What iceberg?”

Bravo! One of your best posts. To append to your list of ‘low hanging fruit’:

per Lowell Bryan’s early ’90’s HBR article (after the LAST crisis-S&L’s): any deposit taking bank backed by deposit insurance to have a certain percentage of its liabilities invested in liquid securities, eg T-bills.

We understand that the rate of bank failures in the US is increasing…

CrocodileChuck

ps MacFarlane-more prescient than he could ever imagine (and so soon!)