http://news.yahoo.com/s/ap/20090618/ap_on_go_co/us_financial_overhaul
WASHINGTON – President Barack Obama’s plan to transform the Federal Reserve into a super-regulator ran into skepticism Thursday from lawmakers who worry that the central bank is not the best suited to keep an eye on firms deemed so big and influential that their demise could hurt the economy.
Democrats and Republicans voiced misgivings as Treasury Secretary Timothy Geithner began a marathon day of selling Obama’s financial regulatory plan to give the Fed more authority, create a new consumer protection agency and bring unregulated sectors of the financial markets under government oversight.
"I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles," said Sen. Richard Shelby, R-Ala., noting that it also sets monetary policy, regulates banks and handles an array of other functions.
Some lawmakers have called for a council of regulators, not a single agency, to oversee and regulate large institutions.
The administration did propose a council to watch for products and trends that could pose widespread risks, but chose not to give it regulatory power to supervise specific institutions.
"You cannot convene a committee to put out a fire," Geithner said.
Sen. Mark Warner, D-Va., argued that a council represented by the Fed, the Treasury and regulators could be better equipped than the Fed alone to recognize and act on institutional risks that could harm the financial markets.
"I don’t believe it would have to be a debating society," he said, adding that the council proposed by the administration is "emasculated."
Committee Chairman Christopher Dodd, D-Conn., also raised questions about the use of the Fed for such an overarching task over the financial system and blamed it for "dropping the ball" on consumer protections. But he applauded the administration for including a new agency to protect consumers in their banking transactions.
Noting that banking interests already are criticizing the new agency, Dodd said: "The very people who created the damn mess are the ones now arguing that consumers ought not to be protected."
Geithner said that in setting up the consumer protection agency, the administration was taking power away from the Fed even as it was adding to its authority.
"That is a substantial diminishment of authority, preoccupation and distraction," he said.
It is likely the Fed itself will mount a defense to keep its consumer oversight duties. Fed officials believe their oversight of mortgages, credit cards and other products fits well with their duties to regulate banks, and that they have the right mix of experts — economists and lawyers — already on hand to do the job.
However, the Fed’s failure to crack down on shady mortgage practices during the housing boom has irked Congress and consumer groups. So has its decision not to speed up implementation of new rules providing consumers with better protections from abusive credit card practices.
Democrats and Republicans challenged Geithner on other details of the plan. Democratic Sens. Charles Schumer of New York and Jon Tester of Montana pressed Geithner to explain why the administration did not seek greater consolidation of regulatory agencies.
"A multiplicity of regulators tends to produce less oversight overall," Schumer said.
Geithner conceded the regulatory system is not ideal. But he said it was not necessary to streamline the system to address the financial crisis that hit Wall Street, and he suggested it would have been a politically difficult task.
"We did not want to put you in a position of having to spend a lot of time on changes that may be desirable, that may leave us with a neater system, maybe a more efficient system, but were not central to the cause of the problem," he said.
The Senate hearing also revealed philosophical cracks between lawmakers who believe the Fed is too independent and those who believe the Obama plan diminishes its independence.
Several lawmakers said they were taken aback by a proposed administration requirement that the Treasury approve emergency loans from the Fed to a troubled financial institution. The Fed can now take such emergency steps on its own.
"All of a sudden the Fed is acting more like a department of the government than an independent bank," said Sen. David Vitter, R-La.
Sen. Bob Corker, R-Tenn., cheekily asked Geithner whether the administration would assure Congress in writing that no one at the White House or in the administration involved in creating the regulatory plan would be in the running to be a new Fed chairman. Corker seemed to have in mind Obama’s top economic adviser, Lawrence Summers, who is often mentioned as a potential successor to Fed Chairman Ben Bernanke, whose term expire at the end of next January.
"No," Geithner replied. "I don’t think that would be appropriate, nor do I think it w
The attitude behind investing the Federal Reserve with more power must be along these lines:
The Federal Reserve is completely separate from anything that has happened. No scrutiny is necessary for considering whether any blame should lie with it. Furthermore, it is granted that it is absolutely morally benevolent. There may be no chance that its officials could be subject to the kinds of corruption that are charged with the firms that it is to be tasked with regulating. Never mind that great levels of power attracted greater corruption and that the Federal Reserve must be the most powerful financial agency in the world.
From the way I present it, I trust that you can gather for yourself that I don’t share this attitude. To be sure, there are crooks and cheats in the financial industry. They need to be dealt with. However, I believe that the Federal Reserve, while it may make an example of a few (maybe they wanted to cast them out anyway), will protect the interests of most of them.
Regulation should be left to the decentralized hand of the market. Absent government monopoly on the matter, firms could arise as industry watchdogs and charge premiums to the people who make use of the financial industry [1]. Most fundamentally, the threat of bankruptcy is an important regulation that has been partially restrained, largely already with the help of the Federal Reserve.
The fact is, where there are great amounts of wealth, there will always be temptation to subvert them to private use through illicit means. I don’t know why people believe that establishing centralized agencies to oversee business is a good way to avert corruption. In my opinion, centralized powerful agencies invite corruption.
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