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Wednesday, November 11, 2009
Do banks need One Big Regulator?

The Federal Reserve system was set up in 1913 to cushion the economy from the booms and busts that used to wreck banks, depositors and borrowers every 10 or 20 years. Since then, we've had one big economic bust about every 50 years. Is that progress? Time to start over?

The Fed includes 12 regional banks, one in Philadelphia, whose boards are made up of local businessmen and bankers and the occasional labor leader (Philadelphia's new Fed chairman is Tastykake ceo Charles Pizzi).

But the Fed's clearest power resides in the New York regional Fed, which oversees the Wall Street banks, and especially in the Washington-based office of the Fed's Chairman, currently Ben Bernanke, who's appointed by the President, and ratified by the Senate.

The Fed only regulates some banks. Others are monitored by examiners from the Treasury Department's Office of the Controller of the Currency (national banks), or its Office of Thrift Supervision (savings banks), or the independent Federal Deposit Insurance Corp. (which also runs the banks' deposit insurance fund), or state regulators.

The Fed's independence from Congress is supposed to enable its chairmen and their boards to stand up to politicians who are tempted to overheat the economy. For example, Paul Volcker kept interest rates high, and helped defeat Jimmy Carter in 1980, bringing in Ronald Reagan, because Volcker, even though he was a Democrat like Carter, believed he had to keep rates high to stop inflation.

But later Fed chairman Alan Greenspan believed in cheap money and limited regulation; he thought markets fixed themselves, and asset bubbles couldn't be regulated away. Timothy Geithner, as New York Fed head during the subprime loan inflation years, seemed to go along with that too. 

And then the banks blew up, wrecking the economy. So now Congress wants to fix things. Writes Blank Rome's Financial Reform Watch:

"Senate Banking Committee Chairman Chris Dodd (D-CT) (on Tuesday) is releasing its comprehensive draft legislation to reform the financial sector. The Restoring American Financial Security Act of 2009 represents a bold and sweeping approach to financial industry reform. The headline emerging from the 1100+ pages will most likely be the creation of a single federal bank regulator. 

"Significant powers would be transferred from the Federal Reserve, the FDIC and the Treasury to a new Financial Institutions Regulatory Administration.  The bill would also create a new Agency for Financial Stability to review 'too big to fail' issues, a new National Insurance Office, and the Consumer Financial Protection Agency proposed by the Obama Administration.  Executive compensation provisions are in the bill with a focus on shareholder votes on certain types of packages, clawbacks and other restrictions. Bill text here   and summary here.

"Chairman Dodd is staking out a big piece of turf in the legislative battle ahead.  Liberated from the need to compromise with committee Republicans and spurred-on by his own re-election worries he is proposing to shake-up financial regulation in the United States in the most aggressive way we have seen to date. 

"No one is a more sophisticated inside player in the Senate than Sen. Dodd. In taking this approach he is advancing two goals—he has put a lot on the table and left himself room to take things off to get the bill passed and he has also taken a stance that will help him fight those in Connecticut who have been saying he is too cozy with the financial sector."

Posted by Joseph N. DiStefano @ 12:06 PM  Permalink | 1 comment
Comments   
Posted 02:14 PM, 11/11/2009
hexyscores
The Federal Reserve system was set up in 1913 to cushion the economy from the booms and busts that used to wreck banks, depositors and borrowers every 10 or 20 years...... Then it is safe to say that the Federal reserve system has been a complete failure! They are as corrupt as our politicians! Pass H.R.1207 as is and the taxpayers will find out what these crooks have been up to! They have debased the dollar by 95% since 1913!
1 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column, which is printed in the business pages of The Philadelphia Inquirer every Sunday, Tuesday, Wednesday, Thursday and Friday. Joe has worked at the Inquirer, mostly, since 1988. He has also written for Bloomberg and Gannett, authored the book Comcasted, majored in economics at Penn, and fathered six children. Reach Joe at 215-854-5194 and JoeD@phillynews.com

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