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June 19, 2009

HOW MUCH SHOULD THE FED BE FED?

Washington Post - As Treasury Secretary Timothy F. Geithner testified before the Senate Banking Committee about the administration's sweeping proposal for financial regulation overhaul, senators repeatedly returned the discussion to provisions involving the Fed. Geithner envisions giving the central bank the authority to directly oversee any firm that is large and complex enough that its activities could endanger the U.S. economy. Committee Chairman Christopher J. Dodd (D-Conn.) quoted an academic who compared the administration's proposal to "a parent giving his son a bigger, faster car right after he crashed the family station wagon.". . . "Mr. Secretary, the Federal Reserve system was not designed to carry out the systemic risk-oversight mission the administration proposes to give it," Sen. Richard C. Shelby (R-Ala.) said. . .

The hostility toward the Fed stands in marked contrast to the way the central bank has been viewed for most of the past 30 years, during which time the Fed has received respect, deference and even occasional adulation in the halls of Congress. The last time the agency came in for such widespread criticism was the early 1980s, when Chairman Paul A. Volcker was blamed by many for causing a recession in his campaign against inflation. This time around, the criticism is more diffuse. Many in Congress, especially Democrats, argue that the Fed was too beholden to a hands-off regulatory philosophy earlier in this decade and that it failed to exercise its powers to protect consumers against risky mortgage and credit card lending practices. . . The central bank has also been faulted for failing to rein in the expansion of Citigroup and other "too big to fail" firms, and for keeping interest rates so low earlier this decade so as to fuel the housing bubble.

Congressional leaders also have growing doubts about the Fed's actions to try to contain the financial crisis and recession. The Fed engineered the bailouts of Bear Stearns and American International Group and has overseen programs totaling more than $1 trillion to support consumer and business lending. It has repeatedly invoked an emergency lending authority, which had not been used since the 1930s.

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