Obama Plan For Fed Power Boost Could Become Lightning Rod
18 June 2009 - 2:52AM
Dow Jones News
The Obama administration wants a super-charged Federal Reserve,
but is balancing the expansion with a regulatory council that may
check the Fed's new powers.
The Obama administration's "Financial Regulatory Reform: A New
Foundation" recommends a council to aid the central bank in
monitoring threats to the U.S. financial system. It also calls for
a broad review of the Federal Reserve System structure.
But, on Capitol Hill, the proposal is still likely to end up a
lightning rod for criticism of the central bank, raising questions
about how much new power the Fed will actually gain at the end of
the day.
The administration's financial regulatory reform proposal calls
for the Fed to serve as an uber regulator of all large,
interconnected firms that could jeopardize the financial
system.
"These proposals would put into effect the biggest changes to
the Federal Reserve's authority in decades," the administration
wrote in a draft paper on its reform proposals.
However, skepticism of the Fed runs high in Congress. Even as
experts laud the Fed for launching unprecedented programs to stem
the worst financial crisis in decades, lawmakers such as Sen.
Bernard Sanders, I-Vt., argue that Fed should disclose the names of
the companies that have benefited from its lending programs. Other
lawmakers argue the central bank failed to adequately regulate
financial firms and address banks' risky practices ahead of the
crisis.
Additionally, critics have argued that the central bank's tasks
should be scaled back so that it can focus solely on monetary
policy.
"There is significant opposition to increasing the powers of the
Fed in Congress and significant concerns over Fed independence,"
said Eurasia Group analyst Dan Alamariu. "This proposal is kind of
a middle ground, trying to satisfy the Congress' wishes for a
council-based approach and at the same time, having the Fed play a
significant role within that council."
Senate Banking committee Chairman Christopher Dodd, D-Conn., and
others have called for a council of regulators to police systemic
risks, rather than solely giving that authority to the Federal
Reserve.
The Obama administration's regulatory overhaul seems to
acknowledge such concerns by recommending a council as a way to
coordinate with the Fed on systemic risk issues.
According to the proposal, the new council would be led by the
Treasury secretary and would also include the Fed chairman and
various other regulators. It would "facilitate information-sharing"
and identify emerging risks and advise the Fed about firms that
could threaten financial stability.
It also seeks to amend the Fed's lending authority to require
the central bank to win approval from the Treasury secretary before
extending credit to institutions in "unusual and exigent"
circumstances. The central bank has invoked its emergency powers
many times since the start of the financial crisis to help aid
companies such as Bear Stearns and American International Group
Inc. (AIG).
Furthermore, the proposal calls for a comprehensive review of
the Federal Reserve System.
The administration also recommends a new, separate
consumer-protection agency to protect consumers when it comes to
credit cards and mortgages.
The question is whether these sideline proposals to review and
cap the Fed's authority will be enough to soothe Capitol Hill
concerns about the larger plan to make the Fed the dominant
regulator of the U.S. financial system.
That said, it's likely the plan will look much different after
lawmakers have a chance to review it, hold hearings and make
modifications.
"There continue to be real concerns regarding the conflicts of
the Federal Reserve System, a la, the abrupt resignation of the
chairman of the New York Fed last month," said Lendell Porterfield,
the head of a bipartisan government relations firm in Washington
and a former senior adviser to Sen. Richard Shelby, R-Ala.
He referred to Stephen Friedman, who resigned as chairman of the
board of the Federal Reserve Bank of New York amid concerns about
his role as a director and shareholder of Goldman Sachs Group Inc.
(GS).
Another sign of lawmakers' frustrations comes in the form of
legislation introduced by Rep. Ron Paul, R-Texas, that would expand
the Government Accountability Office's authority to audit the Fed.
The plan is gaining steam, with some 232 co-sponsors, meaning that
more than half of the House of Representatives back the
measure.
Meanwhile, Republican leaders in the House have drafted their
own regulatory reform proposal that would scale back the Fed's
authorities rather than boost its power.
"Some in Congress already believe the Fed has sacrificed
monetary policy for the sake of the banking system. How does adding
more duties complicate or compromise their existing
responsibilities?" said Porterfield.
On the other hand, proponents of a dramatic boost in the Fed's
powers argue that the White House's regulatory revamp should have
gone further.
"The need to win a consensus across all the regulators, with
their different views, constituencies, and institutional interests
is likely to make it excessively hard to achieve the desired
systemic safety," said Brookings Institution Fellow Douglas
Elliott.
- By Maya Jackson Randall, Dow Jones Newswires; 202-862-9255,
maya.jackson-randall@dowjones.com