Bernanke Warns Against Removing Powers from Fed

As the House and Senate continue to debate financial reform legislation that could sharply impact the Federal Reserve, the Federal Deposit Insurance Corporation and the accounts receivable management industry, Fed chairman Ben Bernanke is continuing to oppose provisions that would strip the Fed of much of its power.

“Understandably, many people are calling for change,” Bernanke wrote in an op-ed column that appeared in Sunday’s Washington Post. “Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.”

The Fed does support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions the Fed used last fall never happen again, Bernanke added. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

“We have toughened our rules and oversight,” Bernake wrote. “We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

Bernanke added that the Fed is supplementing bank examination staffs with teams of economists, financial market specialists and other experts, while the “stress tests” conducted in the spring helped bring back public confidence in the banking system.

“There is a strong case for a continued role for the Federal Reserve in bank supervision,” Bernanke wrote. “Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.”

However, Bernanke concurred that independent does not mean unaccountable. He pointed to the detailed minutes and other information the Fed provides as well as audits by the General Accounting Office (GAO), with the exception of monetary policy decisions.

“He’s preparing the way; he’s going to have to be renominated and approved in January,” said Dan North, chief economist at Euler Hermes, a trade credit insurance firm. Senate confirmation hearings for Bernanke start Thursday. Vermont Senator Bernie Sanders (I) is on record saying that he will vote against renomination.

“The editorial was aimed at the Dodd bill in the Senate,” North added. “He says it goes too far. He is probably right about that. The Fed is an easy target right now. There is a lot of populist sentiment against the Fed. People want something done with the unemployment rate at 10.2 percent and people are finding someone to blame in the Fed. The Dodd proposal is a bit of grandstanding. The people who want to change laws about monetary proposal are the same ones who are ruining fiscal policy.”

Dodd’s bill would create a new consumer financial protection agency (CFPA), a single bank regulator that would consolidate the regulatory power of the Fed, the FDIC, the Office of Thrift Supervision and the Comptroller of the Currency.

Two weeks ago, a House committee approved a proposal to their version of the bill that would grant audit power over the Fed to the GAO to examine monetary policy decisions (“House Panel Approves Fed Audits, Carves Small Banks Out of Reform Fees,” Nov. 20).

Though Bernanke is being blamed for keeping rates too low for too long, he actually increased rates at his first three meetings as Fed chairman, North said. “There was a lot more involved in the financial crisis than just the Fed. You can’t lay the crisis at any one financial entity’s feet. There were many, many reasons that it happened – risk seeking investors, mortgage bankers and mortgage brokers, rating agencies and many, many others, not the Fed’s lack of monetary policy.”