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More Heat For The Federal Reserve

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October 5, 2009

On Thursday, October 1, Federal Reserve chairman Ben Bernanke testified before the House Financial Services Committee.  That event demonstrated how the Fed has fallen into the crosshairs of critics from both ends of the political spectrum.  A report in Friday’s Los Angeles Times by Jim Puzzanghera began with the point that the Obama administration has proposed controversial legislation that would expand the Fed’s authority, despite bipartisan opposition in a Congress that is more interested in restricting the Fed’s influence:

Worried about the increased power of the complex and mysterious Fed, and upset it did not do more to prevent the deep recession, Capitol Hill has focused its anger over the financial crisis and its aftermath on the central bank.  The Fed finds itself at the center of a collision of traditional political concerns – conservatives’ fears of heavy-handed government intervention in free markets, and liberals’ complaints of regulators who favor corporate executives over average Americans.

More than two-thirds of the House of Representatives has signed on to a bill that would subject the central bank to increased congressional oversight through expanded audits.  A key senator wants to strip the Fed of its authority to regulate banks.  And the chairman of the House Financial Services Committee wants to rein in the Fed’s emergency lending power, which it used to help engineer the sale of Bear Stearns Cos. and bailout American International Group Inc.

The article noted the observation of Jaret Seiberg, a financial policy analyst with Concept Capital’s Washington Research Group:

“The Fed is running into unprecedented opposition on Capitol Hill,” he said.

“In the Senate, there’s open hostility toward any expansion of the Federal Reserve’s authority.  And in the House, you certainly have Republicans looking to focus the Fed solely on monetary policy and strip it of any larger role in financial regulation.”

Mr. Puzzanghera’s report underscored how the Fed’s interventions in the economy during the past year, which involved making loans (of unspecified amounts) and backing commercial transactions, have drawn criticism from both sides of the aisle.  The idea of expanding the Fed’s authority to the extent that it would become a “systemic risk regulator” has been criticized both in Congress and by a former member of the Federal Reserve Board of Governors:

House Republicans want to scale back the Fed’s power so the bank focuses on monetary policy.  And many have opposed the administration’s proposal to give the Fed the new role of supervising large financial institutions, such as AIG, that are not traditional banks but pose a risk to the economy if they fail.

“I’m not alone with my concerns about the Fed as a systemic regulator,” said Rep. Scott Garrett (R-N.J.).  Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) has similar concerns, as do others on his panel.  In fact, Dodd has proposed stripping the Fed of all of its bank oversight functions as part of his plan for creating a single banking regulatory agency.

Former Fed Gov. Alice M. Rivlin also said it would be a mistake to increase the Fed’s regulatory powers because it would distract from the central bank’s monetary policy role.

“Do we want to augment the regulatory authority of the Fed?      . . .  My answer is no,” said Rivlin, a senior fellow at the Brookings Institution.  “My sense is many people would be nervous about that augmentation.”

The colorful Democratic chairman of the House Financial Services Committee, Barney Frank, recently published a report card on the committee’s website, criticizing the Fed’s poor record on consumer protection.  The report card contrasted what Congressional Democrats had done to address various issues (categorized under the heading:  “Democrats Act”) with what the Fed has or has or has not done in dealing with those same problems.

Meanwhile, Republican Congressman Ron Paul of Texas, is making the rounds, promoting his new book:  End The Fed.  A recent posting at The Daily Bail website includes a YouTube video of Ron Paul at a book signing in New York, which resulted in a small parade over to the New York Fed.  Although the Daily Bail piece reported that Paul’s book had broken into the top ten on Amazon’s list of bestsellers — as I write this, End The Fed is number 15.  I would like to see that book continue to gain popularity.  Perhaps next time Chairman Bernanke testifies before a committee, he will know that something more than his own job is on the line.  It would be nice to see him make history as the last Chairman of the Federal Reserve.



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