World Bank Chief Leery of More Fed Power

Robert B. Zoellick says central banks had failed to see the dangers that overwhelmed the global economy last year.
Robert B. Zoellick says central banks had failed to see the dangers that overwhelmed the global economy last year. (By Andrew Harrer -- Bloomberg News)
By Peter Whoriskey
Washington Post Staff Writer
Tuesday, September 29, 2009

The head of the World Bank said Monday that the U.S. Treasury Department should be given more authority for financial regulation as he waded into the debate over how the federal government should oversee the banking system.

Apparently alluding to the Obama administration's proposal to give the Federal Reserve a larger supervisory role, World Bank President Robert B. Zoellick warned that the public and Congress historically have been skeptical of granting more power to the Federal Reserve and its "independent and powerful technocrats."

"It should not be a surprise that American democracy is hesitating about authorizing the Fed to supervise systemic banking risks as well as operate monetary policy, adding to its power," Zoellick said.

He suggested that the responsibilities for more supervision of the financial system be granted to the Treasury because "Congress and the public can more directly oversee how it uses any added authority."

Zoellick's remarks came in a speech reviewing the aftermath of the global economic upheaval, which he said threatened to provoke more trade disputes, revealed flaws in central bank policies and reshaped world power relations.

The Obama administration this summer proposed overhauling the financial regulatory system in part by expanding the Federal Reserve's power to regulate large financial institutions whose failure would pose a significant risk to the economy.

But several members of the Senate Banking Committee quickly expressed opposition to the notion of expanding the Fed's power. Progress on the administration's reform package has stalled.

Zoellick, who served in various Treasury posts from 1985 to 1988, said central banks such as the Federal Reserve had failed to see the dangers that overwhelmed the global economy last year.

"Central banks failed to address risks building in the new economy," he said. "Most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the 'real economy' . . . could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong."

His speech also addressed predictions that the United States will see its economic power and influence wane with the rise of developing nations such as China and India. Though the U.S. dollar is currently the world's predominant reserve currency, there will increasingly be other options in the future, Zoellick said.

He also noted that the current assumption is that world politics will reflect the growing importance of China.

"There are good reasons for the perception," he said. "China has responded strongly to the crisis, both in terms of stimulus and monetary policies, and it seems to have a deep treasure chest to back up its first moves."

Still, Zoellick said, "China's future is not yet determined."

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