WASHINGTON – President Barack Obama’s plan to increase the authority of the Federal Reserve is emerging as a major stumbling block to congressional approval of his overhaul of financial industry regulations.
The Fed already faces bipartisan criticism for being too powerful, overly secretive and negligent in protecting the economy from the severe recession. And lawmakers did not let up on the agency in a hearing Thursday as Treasury Secretary Timothy F. Geithner began to sell the president’s changes.
Obama wants the central bank to take on a key new job of regulating large financial institutions – beyond only banking firms – whose failure would pose a significant risk to the economy. But several members of the Senate Banking Committee pushed back on the idea of expanding the Fed’s power.
“Your plan puts a lot of faith in the Federal Reserve’s ability to spot risk and exercise its power to prevent the next crisis. However, if the Fed and other regulators had been doing their jobs and paying attention to what the banks and other firms were doing earlier this decade, they almost certainly could have prevented the mess,” Sen. Jim Bunning, R-Ky., said. “What makes you think that the Fed will do better this time around?”
Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., and the committee’s top Republican, Sen. Richard C. Shelby of Alabama, also told Geithner that they questioned expanding the Fed’s authority because of its failure to detect the financial crisis.
In addition, they and other lawmakers are concerned that giving the Fed more of a regulatory role could impede its independence, which they say is crucial to keeping politics out of its responsibility for setting monetary policy.
The questions about the Fed’s expanded authority highlighted the challenges Obama faces in getting his regulatory overhaul passed into law. The plan, the most comprehensive since the Great Depression, would institute tough requirements on large companies that could damage the economy should they fail, add oversight of such complex financial instruments as derivatives, attempt to rein in executive compensation and create a new agency to oversee consumer financial products.
Most of the key provisions, including changes to the Fed’s powers, require congressional approval. And many members of Congress have called the Fed a prime example of inattentive regulatory oversight of the economy.
At the same time, congressional critics have expressed concern about the Fed’s use last fall of extraordinary emergency lending power to back JPMorgan Chase & Co.’s takeover of Bear Stearns Cos. and to bail out giant insurer American International Group Inc.
The Fed substantially increased its lending to help stabilize the financial system, and many lawmakers want more information about who is receiving the billions in loans. The Fed does not disclose the recipients of loans to protect the confidence of depositors and investors in those institutions.
Legislation proposed by Rep. Ron Paul, R-Texas, to open up Fed funding facilities to congressional audits and oversight has drawn 234 co-sponsors, ranging from conservatives to liberals.
“The fact is that the American people want to know more of the secrets of the temple,” House Speaker Nancy Pelosi, D-Calif., said Thursday, referring to the title of a 1989 book about how the Federal Reserve is run.
Geithner asserted that the Fed was the one government agency that had the expertise to handle the added authority, but Shelby was dubious. “I personally believe this represents a grossly inflated view of the Fed’s expertise,” he said.
In defending the administration’s plan, Geithner also sought to downplay the Fed’s role.
“Our plan is to give it a carefully designed, modest amount of additional authority and clear accountability for the Fed to carry out that mission,” Geithner said. “But we also take some important authority and responsibilities away from the Federal Reserve.”
Geithner said the Fed’s emergency lending authority would be curtailed by requiring approval from the Treasury secretary. The regulatory overhaul would also take away the Fed’s power to write consumer protection rules for such financial products as credit cards and to enforce those rules. Those powers would rest in a new Consumer Financial Protection Agency – itself a controversial proposal among business groups and some Republicans.
Obama’s overhaul would also create the Financial Services Oversight Council to identify emerging risks to the economy.