Around July and August, we began to see evidence of a substantial uptick in the housing market, providing economists the most promising signs the economy is preparing to finally exit the financial crisis doldrums it's suffered through since 2008.
But it is unfortunately not overstating the case to say this still vulnerable growth spurt is at risk from a wrongheaded new rule quietly moving through the regulatory process.
At issue is the Federal Home Loan Bank (FHLBanks) system, heretofore a neglected yet vitally important source of liquidity deeply embedded in the economy.
The FHLBanks' name is a misnomer. Though created by the government more than eight decades ago, they are not a government entity and receive no federal funding. And “home loan” hides its true scope. Simply put, the FHLBanks are a set of cooperatives owned by thousands of financial institutions big and small that provide short and long-term loans to those institutions. The member banks are lenders to the lenders, providing the grease that keeps the economic engine running smoothly.
Unlike other portions of the financial system that nearly brought down the economy in the 2008 crisis, the FHLBanks passed the episode with flying colors. And they have an impeccable record through 80 years of existence.
That's why it's so odd the Federal Housing Finance Agency is moving at blitzkrieg speed to take on the FHLBanks, issuing a proposed regulation to implement unprecedented new asset requirements and a range of other stringent rules that could deeply harm how the system works.
For example, one of the proposals would sharply crack down on the insurance companies that are members of the cooperatives, even though economic experts say they help bring financial diversity to the institution, helping mitigate, rather than exacerbate, risk.
Similarly, the draconian asset requirements, which key members of Congress from both parties have denounced as flagrantly in violation of the relevant statute, would force a significant number of the banks' members to cut ties. Not only would this have the ironic effect of worsening the banks' risk profiles on the margin, it would cut those entities off from predictable, reliable financing, increasing risk on the client side as well.
In some ways, suddenly now finding themselves in a bureaucratic dogfight, the FHLBanks are a victim of their own success. Since nothing has ever gone remotely wrong enough to garner attention from policymakers, there is little knowledge in Washington about the important role they perform. Rest assured, though, that insiders familiar with their role are deeply worried about the proposed regulation.
The issue is gaining traction on Capitol Hill, where key members of both parties, of a broad ideological complexion, have urged the FHFA to back down in increasingly urgent terms.
A bipartisan group in the House that includes the Deputy Whip Rep. Patrick McHenry (R-N.C.) and Rep. John Carney (D-Del.) has introduced legislation to withdraw the regulation and replace it with a proper Government Accountability Office study to evaluate how the changes would impact the economy.
Congress should move expeditiously to pass this bill, H.R. 3808, to give experts a chance to review how these changes could affect the global economic system.
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