In gloomy time, Fed rules are bright spot

The week's economic news is bad. Ugly bad. And that's despite President Bush's hastily called news conference Tuesday to try to calm fears.

Wednesday's news included a report that June inflation rose at the fastest rate in 17 years. Ouch. With gasoline over $4 a gallon, food prices climbing and stock values tobogganing downhill, optimists are as rare these days as cheery bankers.

Meantime, the federal government has come up with a bailout plan for Fannie Mae and Freddie Mac, two large and important government-sponsored mortgage companies that many Americans don't fully understand. But they understand this: Anytime the Federal Reserve chairman feels a need to reassure Congress that a large institution is in “no danger of failing,” as Ben Bernanke did Wednesday with Fannie Mae and Freddie Mac, it's time to get nervous.

Newspaper and TV images of panicked customers of California's IndyMac Bancorp just add to the fears. IndyMac's failure last week was the second-largest such failure in U.S. history, and experts say more banks are at risk.

While the overall economic news is bad – newspaper headlines Wednesday cited “gloom,” “growing crisis” and “turmoil” – it's important not to plunge into deep panic.

IndyMac bank is in an unusual situation. Unlike most banks, it was a major issuer of subprime loans, which are made to risky borrowers. In addition, the FBI is investigating it for possible fraud.

And a couple of developments offered a few shreds of hope amid the gloom. Oil prices fell sharply Tuesday and Wednesday (although that was due to fears of a U.S. economic slowdown). And the Fed – finally – adopted rules this week to crack down on subprime lending. The rules, effective in October 2009, will forbid lenders from making loans without proof of a borrower's income and from making loans without considering a borrower's ability to repay it from sources other than the home's value.

Unfortunately, they're about a decade overdue.

One of the scandals of the current situation is that regulators didn't tighten rules and oversight years ago. Better policing of renegade lenders might well have averted this whole credit crisis.