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Let the Fed regulate

November 20, 2009

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged. 
 
No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions.

First, whatever its earlier lapses, once the crisis hit, the central bank kept the U.S. economy from falling into a depression, at times almost single-handed. It did so by using every bit of authority it had to keep the financial system functioning, often over the objections of small-minded politicians who didn’t understand what was at risk. For that alone, the Fed deserves far more praise than condemnation.

Second, it would be much more difficult for the Fed “to get back to its core enterprises” — that is, fostering maximum sustainable employment and stable prices — without the intimate knowledge that policymakers get about conditions in the banking system if the central bank is shut out of continuing oversight of banks. Another such core responsibility is the central bank’s essential function of serving as the financial system’s lender of last resort. Even in normal times, banks turn to the Fed to borrow money on occasion, and the Fed needs to know what shape an institution is in before it lends to it. Second-hand information from another regulator wouldn’t cut it.

Third, Dodd wants to create a single bank regulator, combining the functions of the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the state-chartered bank supervisory functions of both the Federal Deposit Insurance Corp. and the Fed. The Fed’s bank holding company responsibilities would go there too.

Good luck.

This new agency would have to absorb the bank examiners of all the existing agencies at a time the banking system is still under enormous stress. New lines of authority would have to be developed, and many employees would have to be transferred to new locations. Confusion is far more likely than better regulation and oversight, at least for several years.

If you would like a model, think Department of Homeland Security.

The Obama administration has proposed keeping the Fed in a key role in financial regulation, and the overhaul legislation under consideration in the House Financial Services Committee would preserve a much larger role for the Fed than Dodd’s plan.

But Dodd is up for re-election next year and he is in trouble. So he has chosen the Fed as a whipping boy as seeks to take advantage of public anger over the bailouts of some large financial institutions, and in the process recast himself as a populist after years of defending banks.

Never mind what gets damaged in the process.

Comments

Dodds’ legislation is 100% about making him look good in the elections but probably will not see the light of day. The fed is largely to blame for our woe’s and is swiftly devaluing our dollar along with government policy. Together they are on a crash course to the bottom. I believe this is the beginning of the end of American independence. Our payouts are hundreds times more than our GDP and that increases every day. And the GDP numbers are distorted and do not represent the true output from within America’s borders. The government spends spends spends inflated money recklessly leading me to believe they seriously lack common sense unless they are trying to tank us. All the warning signs are here. We are headed for major trouble unless we reel them in. We may not see the rewards of personal responsibility but our children might if we fly right.

Posted by jason | Report as abusive
 

Buddy, you are right about Dodd’s intentions but the rest of your post seems like a speed-rant. Rather than a serious discussion of the issue you spin out on a right wing torrent of buzzwords like ‘our children, ‘our ‘independence’,and GDP. Are you an economist? Take some courses at your local junior college. Your republican end of the world insecurity is getting old and bored.

 

This article is focused incorrectly.

The FED is not the appropriate regulator because both Greenspan and Bernanke have proven that they will not actually enforce any regulations.

It doesn’t matter who or what is the “appropriate” agency if that agency will not actually perform their role.

Posted by Unsympathetic | Report as abusive
 

Well John, I don’t feel “our children” and “independence” are merely buzzwords. And while this is not the end of the world(which i didn’t claim in the first place) it may be the end of America as I was brought up believing it to be. It doesn’t take an “economist” to recognize that we are headed for trouble. All one has to do is pull their head out of the sand or any other dark place they may have put it in.

Posted by jason | Report as abusive
 

The question is how much do you want a regulatory body to be influenced by politics, and how much you want it to be captured by the banks.

Until proposals to reduce its purview and to audit it, the Fed, because it was insulated from politics, was awful, both under Greenspan and Bernanke, and it sees its goal as protecting the banks, which is, after all much of its reason for existence.

The political pressure that it has gotten has led to it adopting new rules on mortgages, credit cards, debit cards, and gift cards (Gift cards!?!?!? WTF), but this has happened ONLY because of this pressure.

Regulatory authority needs to go somewhere else.

 

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