Beyond Tha Curtain: Let's Give The Bastards More Power!

WSJ-- The Federal Reserve would become the nation's most powerful financial overseer, an approach that is becoming a flashpoint as lawmakers and consumer groups attack the central bank for its role in creating and handling the financial crisis.
The proposal, if passed into law, would represent one of the biggest changes ever in the Fed's role. The central bank would win power to monitor risks across the financial system, and sweeping authority to examine any firm that could threaten financial stability, even if the Fed wouldn't normally supervise the institution. The nation's biggest and most interconnected firms would be subject to heightened oversight by the central bank.

President Obama said the plan would ensure "that lines of responsibility and accountability are clear" by placing authority in the Fed's hands.

Critics who wonder about the wisdom of the move say the Fed failed to use its authority to address loose lending practices and the housing bubble that pushed the U.S. into a recession. The Fed responded aggressively after the crisis began, but some argue those actions were overly secretive.

A movement is spreading in Congress to force the Fed to disclose the identity of institutions that borrow from the bank, a move officials say would discourage firms from seeking needed emergency funds. A large group of House members is pushing to audit the Fed.

"I don't have a lot of faith in the Fed being able to handle that big a universe," said John Taylor, president of the National Community Reinvestment Coalition, a group of 600 community organizations.

Senate Banking Chairman Christopher Dodd (D., Conn.) and House Financial Services Chairman Barney Frank (D., Mass.) both said Wednesday the Fed's role is the biggest potential source of friction in the plan.

Mr. Dodd said there is well-founded concern the Fed's responsibility for monetary policy, including setting interest rates, could conflict with its role monitoring systemic risk. Fed officials have said they can handle multiple responsibilities. "There's not a lot of confidence in the Fed at this point, and I'm stating the obvious," Mr. Dodd said.

Mr. Frank said most of Mr. Obama's proposals reflect a broad consensus on Capitol Hill. But "the interplay between the Fed and the rest of the regulators on systemic risk" will be a thorny issue.

Some lawmakers want an interagency council, another feature of the plan, to have greater responsibility for systemic risk, and the authority to act. Obama administration officials believe a committee approach would allow problems at financial institutions to fester without a clear regulator responsible for addressing them.

"How much power the Fed is going to have is going to be probably one of the most controversial issues about this plan," said Robert Litan, a senior fellow at the Brookings Institution. He said he thinks the Fed's role in the new regulatory framework is likely to be changed by lawmakers.

Treasury Secretary Timothy Geithner reiterated the administration's determination to make the Fed the systemic regulator. "I do not believe there is a plausible alternative," he told reporters.

Fed officials said they took action throughout the financial crisis because the central bank was often the only institution with the power to prevent turmoil. The regulatory overhaul would provide a mechanism for the government to unwind failing nonbank financial institutions, freeing the Fed of the need to act. The central bank has also taken steps to release details about its lending programs.

Despite a major conceptual change in the Fed's role, central bank officials believe perhaps only a handful of additional firms would fall under their supervision. They are also expected to make a case to keep the Fed's consumer-protection responsibility -- with some tweaks -- instead of giving up that role entirely, as envisioned under the plan.

The regulatory overhaul proposed by the Bush administration last year also would have given the Fed responsibility for financial stability. But that plan would have removed its role of supervising banks. Fed officials quietly objected, saying it would be hard to guard against systemic risks without also performing routine bank examinations. The proposal gained little traction amid an escalating financial crisis.

The Obama proposal would require the central bank to seek approval from the Treasury secretary before invoking emergency lending powers. It also calls for the Fed to work with the Treasury and outside experts to review the Fed's structure and governance, including the role of the regional Fed banks. A report due by Oct. 1 would be used to propose changes to the Fed's structure "to improve its accountability and its capacity to achieve its statutory responsibilities."