Bill Gives Fed New Power to Police Risk

By Victoria McGrane – Political.com

Frank’s supporters contend that critics are overblowing the potential for a more powerful, more intrusive Federal Reserve… But Ron Paul himself is not so sanguine. “It’s not finished yet, but they’re getting more powers, and I want them to have less powers,” said Paul. The Fed “gave us the financial crisis, so why give them more power…

The Federal Reserve stands to gain substantial new authority under financial reform legislation, despite increasing skepticism from lawmakers in both parties over the central bank’s unchecked powers over the U.S. economy.

Under the final piece of the House reform package being assembled by Financial Services Committee Chairman Barney Frank, the Fed would join seven other regulators to form an oversight council to police financial firms that threaten the stability of the banking system.

But the Fed is the only member that would be empowered to carry out the restrictions the council imposed on risky big companies — giving it more power than the other regulators, some policy experts say.

The Fed would also have the authority to perform on-site examinations of the targeted financial firms — able to barge into any of the “risky” firms and demand answers and documents, the most powerful tool at any regulator’s disposal.

In fact, any firm tapped for this scrutiny becomes subject to “comprehensive and virtually unfettered Fed oversight,” said John Dearie, a former Fed bank supervisor and executive vice president for policy at the Financial Services Forum.

Under the bill, those systemically risky firms could include entities the Fed doesn’t oversee under current law, including hedge funds, private equity firms and asset managers.

“The bill’s criteria for identifying systemically significant firms expand the Fed’s supervisory purview to a potentially very significant degree,” said Dearie.

To be sure, the bill also seeks to limit the Fed’s emergency lending authority, but the prospect of giving the Fed new oversight powers doesn’t sit well with some members.

“You know the thing about the Fed is that it’s almost like … they operate within their own world. So they’re doing a lot of things which we have really little, if no, control over,” said Rep. Elijah Cummings (D-Md.). “To give them even more power concerns me. I trust [Chairman] Barney Frank. … I’m not on the committee, so I don’t try to second-guess them, but it concerns me.”

Other critics aren’t so charitable.

“The Fed has to accept principal responsibility for the collapse of the economy,” said Rep. Dennis Kucinich (D-Ohio). “They looked the other way when speculation was rampant. They failed to properly supervise banks involved in subprime lending.”

The role envisioned for the Fed in the new regulatory structure hammered out by Frank and the Treasury Department could complicate the bill as it moves from committee to the House floor.

Kucinich is one of 130 or so Democrats — and 311 members overall — who’ve co-sponsored legislation mandating audits of the secretive central bank. The bill’s author is Republican Rep. Ron Paul of Texas, and while he was once viewed as an eccentric outlier in his crusade against the central bank, he’s clearly not anymore.

And the Fed’s far from popular off the Hill. The central bank came in dead last in a July Gallup Poll asking people to rate the job performance of nine federal agencies. A mere 30 percent said the Fed was doing a good or excellent job — down from 53 percent in 2003 and a full 10 points below the Internal Revenue Service, one of the most hated institutions in American public life.

Republicans have already seized on the powers granted to the Fed in Frank’s bill as a top reason to oppose it. Rep. Jeb Hensarling (R-Texas) charged that the so-called systemic risk bill rewards “one culprit” in the financial crisis by giving the Fed “incredible new powers to control a huge segment of our economy.”

“But for the policies of the Federal Reserve earlier this decade, no serious economists believe that we ever could have had a housing bubble,” Hensarling argued during committee consideration of the systemic risk bill last week.

Frank acknowledges that the Fed does gain some power because “there will be more regulatory power for every agency” in the financial reform package. But within that context, the Federal Reserve gains far less than the others, he said.

And the bill will ultimately curb the Fed in other ways, Frank and Democrats on his committee argue, countering the critics. Frank is hammering out language with Paul to include the Fed audit in his bill. Most significant, the bill would place several new restrictions on the Fed’s controversial emergency lending powers — restraints Frank says he intends to tighten further via amendments.

Some experts believe this constraint on emergency lending far outweighs any new oversight powers the Fed gains in Frank’s bill.

At issue is Section 13(3) of the Federal Reserve Act, which permits the Fed to lend to any financial institution in the event of “unusual or exigent circumstances.” It’s the Fed’s use of this power to bail out individual firms such as Bear Stearns and AIG, and to boost its balance sheet by about $2 trillion, that has sparked some of the hottest outrage against the Fed….

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