Shifts in Mortgage Banking? Hyper-Inflation and Federal v. State Banking Powers

Federal Reserve and Hyper-Inflation

Andy Kessler asks a very important question: How do you “Put the Toothpaste Back in the Tube?”

Kessler begins thinking about how the Federal Reserve might go about heading off inflation as the economy begins to recover:

But how? Doing the opposite of what it is doing now. By raising interest rates. By sopping up dollars by not only selling Treasuries, but also selling all those mortgage-backed securities and other toxic stuff bought from Bear Stearns, AIG, Fannie and Freddie, and everyone else. By removing all the backstops it put in for the commercial paper and other markets to keep them functioning. But won’t that have the effect of slowing the economy? Sure will. This is a tightrope act. Getting all that toothpaste back into the tube will require the skills of a surgeon and the moxie of a middle linebacker, and someone deaf, dumb, and blind to congressional meddling. And worse, this is something that has never been done before.

How this actually executes is going to be a critical factor in the future of the mortgage industry and your mortgage business. All assume that it will be nearly impossible to do perfectly. Therefore, using that as a baseline assumption who wins in a mortgage environment with double-digit interest rates?

As the Federal Reserve meets for FOMC this week the question of inflation is beginning to re-enter the discussion.

Federal v. State Banking Powers

Here is another issue that may have strategic impact on the future structure of the mortgage industry: “Can the US Treasury Shield National Banks from New York State Law?”

Four years ago, Eliot Spitzer, then the New York attorney general, asked several national banks to explain why they were disproportionately charging blacks and Hispanics high interest rates.

Instead of an answer, he got a lawsuit. The banks, and the Treasury Department agency that regulates them, persuaded federal courts to bar the state attorney general from enforcing New York antidiscrimination laws.

On Tuesday, the U.S. Supreme Court will hear New York’s appeal. If the state wins, it would mark a break with decades of precedent that mostly favors the powers of the federal government and open a new era for 50 state regulators to play a bigger role.

A shift like this, although unlikely based on past Federal judicial precedence would dramatically shift the structure of banking.