The Fed’s dangerous plan to regulate Wall Street pay

September 18, 2009

The Obama administration wants the Federal Reserve to be the maximum regulator of the American financial system. As Treasury Secretary Timothy Geithner told the Senate Banking Committee, “The Federal Reserve is best positioned to play that role. It already supervises and regulates bank holding companies, including all major U.S. commercial and investment banks.”

The problem, of course, is that most informed observers have concluded that the Fed failed to adequately supervise and regulate banks during the lead-up to the financial crisis. Count Senator Chris Dodd, chairman of the Senate Banking Committee, in that camp. “There’s not a lot of confidence in the Fed at this point,” Dodd said right after the White House released its financial reform proposal.

This is where Daniel Tarullo makes his appearance. The newest member of the Federal Reserve has apparently authored a plan to have the central bank approve compensation policies potentially But previous to joining the Fed, Tarullo was an influential economic adviser in the Obama presidential campaign.

So now what we have, I think, is Obama’s man at the Fed pushing a politically savvy plan that could bolster the Fed’s standing as a tough regulator in the eyes of Congress and deflect some of the criticism of the central banks past failings. Score one for the White House in its push to make the Fed super-regulator.

Surely, the timing couldn’t be better. Not only has the administration been refocusing attention on passing financial reform – witness the president’s tough Wall Street speech – but next week’s G-20 meeting will include extensive discussion about banker pay issues.

But this is a case where good short-term politics makes for bad long-term bad policy. The greater the Fed involvement in the regulatory process, the greater attention it will receive from Congress – and the greater the threat to its cherished independence.

As it is, the Fed’s historic efforts to rescue the financial system have raised concerns on Capitol Hill that it has too much power with too little oversight. That’s why Rep. Ron Paul’s bill to audit the Fed, according to Financial Services Committee Chairman Barney Frank, will pass the House this year. (Indeed, what Paul really wants to do is end, not mend the Fed.)

Really, could anyone possibly believe that having the Fed become the pay czar at 5,000 banks would lessen congressional interest in its activities, including monetary policy? Not to mention that a better solution to excessive financial risk taking is the restoration of market discipline on Wall Street.

Better that Wall Street understand the consequences of poorly incentivized pay structures. “Too big too fail” remains the biggest threat to America’s fragile financial system.

3 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

It is because of the Feds; the financial institution has been saved. It is the wall street fat-cats that are responsible for the mess we are in; which is primarily due to their greed. I believe all those responsible should be in prison. They have been getting big bonuses and pay; HOW about when they have a loss; They should be responsible to cover the loss from their own pocket. But; Oh no; they want to continue their greedy game and the tax payers have to cover their ass.

JUST BECAUSE THEY ARE “FAT CATS” DOES NOT MEAN THAT IT WAS DONE BY FRAUD. I AGREE THE FRAUDSTERS SHOULD BE IN PRISON BUT, JUST BECAUSE YOU SUCCEEDED IN THE BOOM YOU ARE NOT A BAD PERSON! YOU DON’T REGULATE SOMEONES PAY WHEN THEY ARE SUCCESSFUL. THE REASON WE ARE IN THIS MESS IS BECAUSE OF THE FRAUD ON EVERY LEVEL INCLUDING YOU AND YOUR STATED INCOME HOME LOAN THAT YOU GOT. THAT’S NOT THE BANKS FAULT, THAT’S THE FED’S FAULT, THE B. FRANKS OF THE WORLD THAT THOUGHT EVERYONE WAS ENTITLED TO A HOME WEATHER OR NOT YOU MADE ENOUGH MONEY. THE BANK DID NOT IMPLEMENT THESE RULES UPON THE FEDERAL GOV’T THE GOV’T DID! ONCE AGAIN, YOU DON’T PUNISH PEOPLE BECAUSE THEY DID IT RIGHT AND SUCCEEDED. YOU PUNISH THE FRAUDSTERS!

IN MY OPINION THE BANKS,THE FED, AND THE GREED OF THE MANAGEMENT AT THE TOP ARE ALL AT FAULT FOR THIS MESS WE ARE IN . THESE GUYS WOULD RATHER SPEND OUR INVESTMENT CASH ON A PLUSH OFFICE AND TRIPS FOR THE UPPER ECHELON THAN TO RETURN IT TO ME IN INTREST EARNED IN MY ACCOUNT. THEY ARE A BUNCH OF EGOTESTICLE IDIOTS AND THE ONLY WAY TO CONTROL THEIR THEIVING WAYS IS TO REGULATE THEIR COMPENSATION. BUSINESS AS USUAL THE RICH ARE STILL SCREWING EVERYONE THEY CAN AND FEEDING THEIR WALLETS WITH OUR CASH. ITS LIKE THE REGAN TRICKLE DOWN THEORY THAT DIDNT WORK EITHER. REGULATE THESE GUYS NOW OR WE WON’T HAVE A SYSTEM LEFT TO REGULATE. CHARLES BOWEN

Posted by charles bowen | Report as abusive

[...] The Fed’s dangerous plan to regulate Wall Street pay [...]

[...] The Fed’s dangerous plan to regulate Wall Street pay [...]