Robert Reich
Robert Reich - 
Listen To The Story


Scott Jagow: Congress is trying to figure out ways to clean up the subprime mess and make sure it doesn't happen again. But commentator Robert Reich says the federal government already has all the authority it needs to tackle the problem. It just isn't using it.

Robert Reich: As someone who was in charge of one of the biggest regulatory agencies in the federal government, I can tell you regulations themselves don't do squat. They have to be vigorously enforced. And that means setting clear rules, having enough inspectors, and knowing when vigilance is required.

So how to prevent another banking crisis that causes millions of families to lose their homes and investors to lose their shirts? The Federal Reserve already has the authority it needs to do this. The Federal Reserve Act of 1913, as amended, and the Bank Holding Company Act of 1956, give it power to monitor and regulate the entire banking system.

The problem here was it failed to use this authority. It wasn't even paying attention.

A few years back, when the Fed lowered short-term interest rates to 1 percent, money became so cheap the Fed should have known lenders would hand it out to almost any borrower who could stand up straight. Especially when lenders could immediately fob off the loans to middlemen who bundled them and sold them off again.

Big banks, hedge-fund managers, everyone looked the other way because the party was too much fun. And then when the Fed started raising rates, it should have known the party would be over -- and there'd be a mess to clean up.

But the Fed didn't -- and still doesn't -- pay enough attention to the effects of its rate settings on the practices of lenders and borrowers. It still doesn't have enough bank examiners who know what to look for. Still doesn't know how to oversee giant financial conglomerates whose deals are so complex even their own top executives don't understand them. Is even now disregarding the next banking crisis, which will be a wave of credit-card defaults.

Instead of pumping out new regulations, Congress should give the Fed the resources it needs to use the authority it already has. Confirm new Fed governors who will be vigilant in overseeing the banking system. And hold all Fed appointees accountable for doing the job they're supposed to do.

Jagow: Robert Reich was labor secretary under President Clinton. His new book is "Supercapitalism."