More Power for the Fed?

The New York Times reports: "The plan the president will formally
announce on Wednesday would give the Federal Reserve greater
supervisory authority over large financial institutions whose problems
pose potential risks to the economic system."

ROBERT AUERBACH
Professor of public affairs at the University of Texas at Austin,
Auerbach wrote the book "Deception and Abuse at the Fed: Henry B.
Gonzalez Battles Alan Greenspan's Bank." He said today: "The Federal
Reserve has massive conflicts of interest that make it ill suited for
its present regulatory functions and certainly for an expanded
regulatory reach. The officials leading the Fed today preside over an
organization that is run in substantial part by the bankers they
regulate. Bank regulation begins at its 12 district Federal Reserve
Banks, each governed by a nine-member board of directors, two-thirds of
whom are elected by the bankers in the district.

"The plan for a separate federal government 'board' over all
regulators to coordinate systemic risk management is also not a good
idea. There have been poor results with divided regulation between bank
regulators despite the creation of the Financial Institutions
Examination Council (FFIEC) in 1979 to coordinate regulation. The FFIEC
has had as much influence on the secretive Federal Reserve, which
regulates the financial holding companies of the huge superbanks and
foreign banks, as hitting the powerful bureaucracy with a wet noodle."

NOMI PRINS
Author of Other People's Money and the forthcoming It Takes a Pillage, Prins just wrote the piece "The Big Bank Bailout Payback Bamboozle."
She said today: "As Treasury Secretary Tim Geithner talks tough about
financial regulation, the banks are paying back federal subsidies with
other federal subsidies -- classic definition of a Ponzi scheme.

"The 'sweeping overhaul' of the financial system detailed by
Geithner on behalf of the Obama administration does not overhaul the
system at all. True, items like enhanced issuer accountability and
restrictions for securitized products, greater leverage constraints and
relegating certain derivatives to exchanges, are useful alterations.
But, giving the Fed a bigger role, creating a 'council of regulators'
to oversee the existing oversight bodies and allowing the biggest Wall
Street players to maintain their status, leaves the system intact.

"The Federal Reserve is not a fully public entity. It has amassed
a set of $7.87 trillion worth of facilities and other entities through
which it has lavished cheap loans in return for questionable collateral
from the banking system. It has kept the true nature of these
transactions a secret despite numerous FOIA requests. And, it has
actively promoted the creation of bigger institutions in a chaotic
environment, rather than putting the brakes on the creation of these
giants. ...

"Rather than regulate a complicated industry by creating more
layers of regulatory entities and giving more power to the Fed, which
deserves a stringent audit instead, the more lasting solution to
financial chaos would be to actually restructure the banking industry
itself: divide banks into consumer vs. investment bank entities, like
the Glass Steagall Act did in 1933 -- until it was repealed during the
Clinton administration." A former investment banker turned journalist,
Prins is a senior fellow at the think tank Demos.