Lawmakers Balk As Administration Tries to Redefine Central Bank's Role
Friday, June 19, 2009
The Federal Reserve, which has been at the center of the government rescue of the financial system, is now on the hot seat, with a debate on Capitol Hill emerging over its responsibility for the crisis and its proper role in preventing such events in the future.
Lawmakers are simultaneously annoyed that the Fed did not do more to rein in the bad lending and other financial excesses that led to the financial crisis and recession, and wary of the Fed's aggressive steps over the past two years to combat them. The criticism of the Fed is increasingly loud, bipartisan and from both chambers of Congress.
The Obama administration announced Wednesday that it wants to give the central bank more power to oversee risks to the U.S. economy even as it strips the Fed of power to protect consumers and limits its authority to make emergency loans. But the expansion of its role is already proving to be the most controversial element of the president's plan to revamp financial regulation.
As Treasury Secretary Timothy F. Geithner testified before the Senate Banking Committee yesterday 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.
Geithner argued that the changes are "not a dramatic increase in the Fed's powers" and said that spreading responsibility for the financial system around a range of agencies is a surefire recipe for inertia in a crisis and a lack of accountability. "You cannot convene a committee to put out a fire," Geithner said.
The Obama administration, along with many outside financial experts, argues that the Fed is best suited to the regulate the overall financial system because it already has extensive expertise in monitoring risks to the economy and overseeing big, complicated companies. Moreover, some lawmakers argue, there are few other obvious solutions. "I tend to agree that the Fed is the best answer, though there are no great answers," Sen. Charles E. Schumer (D-N.Y.) said yesterday.
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. (Fed officials generally acknowledge they were slow off the mark but also note that they lacked the authority to oversee many of the firms that made the worst mortgages.) 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.
Even as it expands the Fed's power over the largest financial institutions -- potentially including insurance companies, investment banks and hedge funds -- the Obama plan would take away Fed authority in others.