Should Bernanke Take it Personally?

By Lisa Valentine

As part of its plan for financial reform presented this summer, the Obama administration sought to extend the power of the Federal Reserve, giving Chairman Ben Bernanke and company increased ability to monitor systemic risk and regulate the largest financial institutions—banks and others—in the U.S.

But Obama’s fellow Democrats have lambasted that plan. Democratic congressional representative Barney Frank, chairman of the House Financial Services Committee, is set to introduce a bill that makes the Fed share bank oversight with other regulators. Chairman of the Senate Banking Committee Chris Dodd has introduced legislation that also seeks to limit the role of the Fed. No longer would the Fed have the ability to grant emergency loans to individual companies or to supervise banks.

In Dodd’s plan, the Fed’s role as banking regulator would be combined with the supervisory powers of the FDIC into a new agency.

Said Dodd about the plan: “We will end “too big to fail.”  We cannot allow the collapse of a few firms to threaten our entire economy.  Our plan will create an independent council of regulators to identify risks, so that government can act to prevent a crisis.  We will have a mechanism in place to safely shut down large failing companies without destabilizing the financial system.  No longer will the Federal Reserve’s emergency lending authority be used to prop up a failed institution.”

Is this political posturing or do these democratic legislators see a real danger in giving the Fed supreme power? When did Bernanke fall from grace? It didn’t help matters when Bernanke argued that the Fed should be largely unaccountable to politicos and taxpayers so as not be influenced as it set monetary policy. Bailing out AIG also did not do much for Bernanke’s’ image.

It many ways, the Fed made its bed and now it must lay in it.

Dodd supporter Senator Mark Warner remarked in response to Dodd’s bill, “[The Fed] has obviously failed” in systemic oversight and “it’s monetary policy responsibilities present potential conflicts, and it has proven incapable of properly regulating large institutions.”

Dodd’s bill also strips the Fed of any role it may have played in consumer protection.

Not surprisingly, the American Bankers Association is unhappy with the proposed reform. ABA president Ed Yingling remarked, “[This proposal] would tear apart the existing regulatory structure only to crate a new one that would produce conflicts among regulators, undermine the state-chartered banking system and impose extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis.”

SEC Chairman Mary Schapiro should be pleased with Dodd’s plan as it gives the SEC the ability to self-fund by collecting registration fees—something Schapiro has been asking for some time.

Also part of Dodd’s bill: requiring hedge funds worth more than $100 million to register with the SEC and OTC derivatives would be regulated both by the SEC and the Commodity Futures Trading Commission.