Roger Cole, director of banking supervision and regulation, told the Senate today, that the Fed "could have done more sooner" to anticipate a subprime market downturn.

Despite this limited admission of guilt, complacency still rules at the nation’s banking regulator. Mr. Cole does not believe that the problems of the sub-prime sector will spill over to the wider mortgage market or the banking sector.

In an impressive performance, Senator Christopher Dodd said "Our nation's financial regulators were supposed to be cops on the beat yet they were spectators for far too long," Another Senator warned of a "tsunami of foreclosures" while another complained that a "sort of frenzy gripped the markets. Many brokers and lenders started selling these complicated mortgages to lower-income borrowers, many with less than perfect credit."

For the sake of the country, let us all hope that Roger Cole is right. Some of us are old enough to remember the S&L disaster. Banking crises are amongst the ugliest economic disasters that can befall a country. Typically, such crises are followed by deep and sustained recessions, unemployment and misery.

Unfortunately, the Fed’s performance up to this point should make us fearful. It has been obvious since at least 2003 that lending standards have deteroriated, and they did nothing about it. It is late, and for some subprime borrowers, it is too late, but the Fed should immediately tighten lending standards. It should limit the use of exotic loans such as interest-only loans, ARMs and no-doc mortgages. These actions would help restore confidence in the Fed’s capacity to regulate the market, It will begin to restore confidence in the nation’s financial regulator.