Academic journal article ABA Banking Journal

What We Need Is a "Rational Cooling"

Academic journal article ABA Banking Journal

What We Need Is a "Rational Cooling"

Article excerpt

It was a year ago December that Alan Greenspan made his infamous reference to the markets showing signs of "irrational exuberance." It's too bad he couldn't have been more blunt about it. But occupying the most important financial position in the world, the Fed chairman is forced to couch his observations in the most indirect and often obscure language, something he's quite good at.

Even if he had been more direct, it's doubtful much would have changed. When it comes to rate changes, the markets listen to Greenspan's words with the concentration of a hungry dog eyeing a bone. But when the words are directed at their behavior, the markets dismiss warnings with disdain, no matter who is saying it. They know advance and retreat. Caution is not something the markets deal with very well.

Other officials, in less prominent posts than Alan Greenspan, have been able to speak more plainly about financial concerns. One is Julie Williams, acting Comptroller of the Currency.

In several speeches since April she has spoken plainly about lapses in underwriting standards. Mostly she has directed her remarks toward commercial lending. But in her speech to the ABA Annual Convention in late September, she called banks to task for consumer lending abuses.

Williams took pains to point out that the great surge in consumer credit has brought many benefits. "It has opened the door to economic opportunity for millions of Americans who would otherwise have remained on the outside looking in." But she sharply criticized several practices occurring now, when consumer debt has reached near-record levels, and with an economic slowdown looming. These included credit card solicitations to college and high-school students, "teaser" interest rates, and aggressive marketing of home equity loans for debt consolidation. The latter can make sense, Williams said, but a study has shown that about two-thirds of the people who had consolidated their unsecured debt had "reloaded" their cards to varying degrees.

(Julie Williams' speech is well worth reading. A transcript of it can be found on our Web site listed under the table of contents for this issue. The site's address is

Given how quickly economic events have unfolded since mid-summer, you could argue that Williams' consumer credit message should have come much earlier. But it's equally arguable that even if she or anyone else had done so, little heed would have been paid. …

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