Bloomberg TV reported that the Obama Administration is planning to strip the Securities and Exchange Commission (SEC) of some of its regulatory powers and give them to the Federal Reserve Bank (FRB). As to what specific powers that will be removed from the SEC are unclear at this time.
Notwithstanding a lack of details, to transfer regulatory powers to the Federal Reserve Bank from the SEC would be like rearranging the chairs on the deck of the Titanic because the ship’s captain failed to avoid the ship-destroying iceberg.
General arguments against transferring more regulatory policy to the Federal Reserve Bank will be presented below the fold.
First and foremost, the Federal Reserve Bank’s lack of public accountability and extraordinary secrecy rules make it an inappropriate candidate to regulate financial firms – systemic risk notwithstanding. A prime example of the Fed’s lack of public accountability and secrecy would be the case of the one-trillion-dollar increase in the Fed’s balance sheet.
Attempts, which included a Freedom of Information Act suit by Bloomberg LP, to obtain information on this enormous increase in the Fed’s balance sheet were futile. The following excerpt from the Bloomberg article, "YouTube Clip of Lawmaker, Fed Official Draws 166,000" is highly representative of the Fed’s accountability and secrecy problem – administrative features not desired in a public regulatory agency.
"What have you done to investigate the off-balance-sheet transactions conducted by the Federal Reserve which, according to Bloomberg, now total $9 trillion in the last 8 months?" [Rep. Alan] Grayson [D-FL] asked [Federal Reserve Bank/Board Inspector General Elizabeth] Coleman.
Coleman, who was appointed to the position in May 2007, said in the hearing that she hadn’t seen the article.
A Bloomberg News story published Feb. 9 said the Treasury Department, Federal Deposit Insurance Corporation and Fed have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. A March 31 article raised the total amount committed or disbursed to $12.8 trillion.
A statement e-mailed by Coleman’s office yesterday said the Fed board’s inspector general doesn’t have legal authority to investigate the transactions that have swelled the central bank’s balance sheet.
The second reason that the Fed’s regulatory powers should not be enhanced is that the Federal Reserve Bank, when populated by Republican appointees, has equally illustrated as strong an aversion as the SEC to regulating financial institutions. Regulation under the former Chairman of the Federal Reserve Bank, Alan Greenspan, was virtually nonexistent for almost 20 years. The following passage (boldfaced emphasis added) from MSNBC’s article, "Greenspan admits ‘mistake’ that helped crisis" shines a bright light on the regulatory philosophy of Mr. Greenspan.
.... At an often contentious four-hour hearing, Greenspan, former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox were repeatedly accused by Democrats on the committee of pursuing an anti-regulation agenda that set the stage for the biggest financial crisis in 70 years.
"The list of regulatory mistakes and misjudgments is long," panel chairman Henry Waxman declared.
Greenspan, 82, acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that "a flaw in the model ... that defines how the world works."
He acknowledged that he had also been wrong in rejecting fears that the five-year housing boom was turning into an unsustainable speculative bubble that could harm the economy when it burst. Greenspan maintained during that period that home prices were unlikely to post a significant decline nationally because housing was a local market.
Ideology, not protection of the American economy, seemed to have been the underpinning for regulatory policy at the Federal Reserve Bank during Mr. Greenspan’s twenty-year chairmanship.
A tertiary argument against giving the Federal Reserve Bank additional regulatory policy involves a possible conflict with the Fed’s twin obligations to manage the money supply in support of full employment and inflation objectives. With a nominal amount of imagination, one could foresee a scenario in which a Federal Reserve Bank Chairman would have to decide between fighting inflation or facilitating employment and regulating systemic risk to the nation’s economy – a situation that may require actions that are incompatible with the Fed’s inflation and employment responsibilities.
No, the SEC’s regulatory powers should not be reduced but enhanced, and the Federal Reserve Bank should be limited to a supporting role as regulator of financial institutions – supporting the SEC, Office of Thrift Supervision, U.S. Comptroller and Federal Deposit Insurance Corporation in their efforts to regulate financial companies.