Volcker Warns Against Overloading Fed
Thursday, February 5, 2009
Congress risks undermining the Federal Reserve's independence if it provides the central bank with new powers to manage the financial system, former Fed chairman Paul A. Volcker said yesterday.
Nevertheless, he recommended that lawmakers move aggressively on a regulatory overhaul.
Volcker, a top economic adviser to President Obama, did not suggest lawmakers avoid entrusting the Fed with more responsibilities to reduce threats to the financial system. But his remarks before the Senate Banking Committee underlined concerns that such a move could dilute the Fed's traditional focus on monetary policy.
The Obama administration and lawmakers are now considering ways to revamp the nation's vast regulatory system, which proved ill-equipped to spot the weaknesses in the financial system that led to the current crisis. The Bush administration last year called for putting the Fed in charge of the stability of the financial system as a whole, and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, has said he wants to pass a bill along those lines this spring.
If such a bill were to be passed into law, however, "You will have a different Federal Reserve," Volcker said.
"Do you worry that if Fed accepts too many responsibilities, its ability to conduct monetary policy may be undermined?" asked Sen. Richard C. Shelby (R-Ala.).
"Yes," said Volcker, who stressed that he was appearing before the committee in his capacity as head of an international group of financial experts, not in his role as chairman of Obama's economic advisory committee.
The former Fed chairman said Congress will "have to consider whether that's a wise thing to do, given what's considered now [the central bank's] primary responsibilities for monetary policy."
Banking Committee Chairman Christopher J. Dodd (D-Conn.) expressed openness to the idea of putting the Fed in charge of monitoring firms that pose a systemic risk -- essentially large institutions whose failure could endanger the entire economy. But he, too, acknowledged the risks. Dodd was also wary of overextending the Fed when it has, in his view, failed to protect consumers in the past.
There are signs that the Senate will move more slowly than the House in trying to redesign financial oversight, whatever role the Fed ends up playing. In fact, Shelby, the ranking Republican on the Banking Committee, argued strenuously yesterday that the committee should launch an expansive investigation into what caused the current crisis before attempting to reformulate the regulatory system.
"Before we entrust any new or existing regulator with additional responsibilities or authorities, we need to know if, and how, our present regulatory structure failed," he said. Shelby suggested that such an investigation be modeled after hearings in the 1930s into what caused the Great Depression, and that regulators, bank chiefs, insurance executives, home builders and others be called to testify to explain what failed and why.
Dodd spoke approvingly of an investigation into how the crisis arose, suggesting the idea of a panel akin to the 9/11 commission that investigated the 2001 terrorist attacks. But he said he feared that by spending time looking backward, the Senate could miss a unique opportunity to move forward since there is broad political support for reform.
"My concern is if we miss the moment, we will find ourselves in a deeper hole," Dodd said.
The discussion yesterday remained broadly focused, and neither Volcker nor the senators seemed willing to explicitly endorse any one approach to revamp financial regulation.
For example, Dodd asked Volcker whether it would be good for the agency that is responsible for the stability of banks to also oversee consumer protection. "I think that's a serious issue," said Volcker, who is highly respected among lawmakers for his role in ending stagflation in the 1970s. "I don't want to express an opinion now, but I have certain sympathy for exploring it."
When Sen. Mark Warner (D-Va.) asked which country's financial regulatory system the United States should emulate, Volcker demurred, saying that the Group of 30 -- the body of financial experts that he leads -- has research on the pros and cons of each nation's approach.
"The question isn't whether it should happen," said Gary DeWaal, senior managing director of Newedge, a global brokerage firm, referring to regulatory overhaul. "It needs to happen. The problem is we have been studying this matter for the last decade, and the time for study is over. We need to reach conclusions and implement solutions. If we haven't done that, we haven't learned the lessons of 2008."