Politics of Regulation and Prudential Oversight - Article Example

Many government-sponsored enterprises came into operation for the expansion of lending to give rise to the people owning properties. The US wanted to increase the percentage of homeowners which is why the policy by the FED of issuing subprime loans was relaxed, also as there were many competitors in the market issuing loans, the competition gave rise to the issuance of loans without proper risk identification. It is therefore clear from the background of the years that lead to the crises, that the commonality among the Fed policy-makers and outside interest groups made FED relax the loan-based policies and in turn, the public interest was compromised along with proper accountability of the process.
There were many incidents of the courts interfering with the rise in improper lending practices but FED ignored all these acquisitions and disregarded any amendments by the courts. This response of the FED was of course due to its inclination toward the housing authority of the US. Another reason FED gave support to mortgages was that as there were many innovations in scrutinization, there was a huge amount of money available for mortgage lending.
The fundamental statutory charge of the FED indicates that it is only responsible for providing stable prices, providing maximum employment, and moderate long-term interest rates. This makes it evident that the role of the FED is not to direct the residential mortgage markets or to provide supervision to the lenders outside the banking system therefore; FED is not even well suited for policing the mortgage practices in the country. The main reason for the credit crunch of 2008 is the effect of the environment of the policy process on FED, if this not had been so, this financial setup could have been foreseen, and if not eliminated, it could at least have been a lesser extent.

II. Organizational Capacity: Is the FED Capable of Prudential Oversight?
FED is capable of prudential oversight but for this, it will have to restructure the alignment of its resources and initiate an introduction of a variety of interests to the choices of policies that influence both monetary policies and bank supervisorial policies. Initially, the FEDS core proficiency was connected to the behavior of the banks and their actions as lenders, this expertise of FED was directly acquired through the supervision of banks and implementation of monetary policies.

These public actors include many public sector agencies along with private sector associations. The prudential oversight will need to address all these external actors and reform all regulations keeping in mind the mistakes that led to the credit crunch of 2008. It will be very difficult to reform the system of FED in terms of safer mortgages and lending practices as there are many actors involved in this mortgage business, they will also have to keep in mind the public benefit which was ignored in the initial extension of subprime loans.

The risks involved in extending credit have to be addressed properly to establish mortgages with a reduced element of risk. There has always been an extension in the financial practices through the innovation in lending practices and the formulation of new institutions and banks; therefore, to develop a safe environment for lending, FED will also have to formulate a body for the assessment of the innovations in the financial industry. Many financial institutions are also interrelated with FED, and to aid the regulatory process, FED has to keep supporting its goals alongside its operation.

Ensuring the perfect supervision of all the practices initiated by these institutions is very complicated for FED as it requires much identification and a close watch over the after-effects of these practices. Aiming at prudential oversight, many policies will have to be readdressed. Moreover, prudential oversight will have to formulate policies to save the financial organizations from the occurrence of defaults and financial imbalances, which in turn creates a playground for the occurrence of the financial crunch as seen in 2008.