Single Regulators And The Fed

I think a single agency to regulate all banks makes a lot of sense. For all their carping about how every financial firm is different, the banks have certainly taken advantage of multiple regulators to pick and choose which one they want regulating them, leading to lenient rules and a lot of looking the other way as the regulators compete for their business.

The question, of course, is what form that single regulator would take. And vesting the Federal Reserve with some of these powers (though their role would be separate from the single bank regulator) gives me the willies:

They favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds.

Officials also favor the creation of a new agency to enforce laws protecting consumers of financial products such as mortgages and credit cards.

And they want to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission, which share responsibility for protecting investors from fraud.

I like the Financial Products Safety Commission idea to protect consumers from mortgage flim-flammery and other banking products. But the Federal Reserve has acquired enormous power throughout this crisis. The Public-Private Investment Plan, which was supposed to buy up those toxic assets from the banks, looks almost dead, as the banks raised enough money and averted enough disaster to fashion themselves healthy and secure. It looks like there will be some modified buy-up of the assets (which the banks might be able to swap for one another's and game the system using taxpayer dollars), but no major clean-up. And that's because the Federal Reserve has become the 800 lb. gorilla in this crisis.

Recently, I asked an administration official which government program we'd remember as making the most difference in averting catastrophe. Where will the history books place the credit?

"It'll be the Federal Reserve," he replied. "It'll be their decision to increase the size of their balance sheet from whatever it was before the crisis to whatever it is now." The Fed's decisions, of course, have attracted relatively less press coverage, both because the Federal Reserve doesn't speak to the press as often as the Treasury Department and because new Federal Reserve policies don't spark tiffs with the Congress, or the Republican Party, or outside economists. As such, the Fed is a bit harder for reporters to write about. But there's some evidence that it will be Ben Bernanke, rather than Tim Geithner, who our children -- at least our nerdier children, the ones who study the recession of 2009 -- will read about.

But what will they read? The Fed releases no public information, just prints money in the trillions, making deals with absolutely no transparency, and basically keeping the financial world on life support. What we may all read is the difficulties of the Fed reeling back all these lifelines they handed out to the financial industry.

Lately, a steady stream of economic data has suggested that while the economy is still shrinking, the pace of the decline is slowing. That, in turn, has stoked fears that the Fed's efforts to steer the economy away from a 1930s-era depression would push the country toward '70s-style inflation.

Those fears center on the Fed's unprecedented efforts to revive the economy by creating more than $1 trillion in new money. Determining the best time to withdraw that money is a classic quandary for central bankers. The challenge of timing is even more daunting than usual this time because the Fed has become so integral to shoring up the financial system. As Fed leaders ponder their next move, analysts say they may have to choose between propping up credit markets today and fighting inflation tomorrow.

Yet this absolutely crucial policy decision has been literally vested in the hands of one man, Ben Bernanke, and an organization that has an unusually cozy relationship with the biggest banks who, after all, own them. The government ought to at least have some input and some transparency when it comes to these matters. Alan Grayson has put together a bill, H.R. 1207, that would allow the GAO to audit the Federal Reserve. This is overdue. We have no idea how many trillions the Fed has spent propping up the banks, and considering the importance and the thorny issues to come, we ought to know. This measure has attracted 181 sponsors from members of both parties. You can sponsor it here.

No viable political system can vest so much power in a closed loop and hope to survive. We need more information from the Fed.