A Federal Reserve bank president is calling on Congress to beef up regulatory powers of the central bank – rather than strip it of oversight responsibilities – to help prevent a future financial crisis.
James Bullard, who heads the Federal Reserve Bank of St. Louis, said more authority would give the Fed more windows into the financial system, among other things.
“You want to force your central bank to know more and understand better what the interactions are and how this financial sector’s working, and it is big and always evolving,” Bullard told Fox Business on Monday. “You want those guys to be well-informed about everything that’s going on in financial markets so that they maybe can head off a crisis, or if they don’t head off a crisis, they will be able to react to the crisis in the best way possible.”
The Fed has been under attack in Congress by critics who say it contributed to the financial crisis through lax bank oversight and by keeping interest rates too low for too long after the 2001 recession and the attacks of 9/11.
One reform proposal, from the chairman of the Senate Banking Committee, Sen. Christopher Dodd (D-CT), would give the Fed’s bank supervision powers to a new super-bank regulatory agency. The Obama administration’s reform plan would strip it and other bank regulators of their consumer protection authority and give it to new Consumer Financial Protection Agency.
Bullard argued against such steps, saying the Fed needs more oversight responsibility, especially over non-bank firms like Lehman Brothers, Bear Stearns and AIG (AIG). Their failures rocked the U.S. and international financial systems, nearly triggering a global financial collapse.
“In the ‘shadow’ banking system, the Fed did not have any regulatory authority,” he said.
Bullard asserted the Fed needs such expanded powers – which it would get under legislation proposed by the administration and passed by the House in December – also because “in the future crisis, here’s what will happen: everyone will come to the central bank because the central bank is the lender of last resort.”
Bullard offered tentative support for two new administration proposals from former Fed chairman Paul Volcker, who is advising President Obama. One would limit riskier, more speculative business activities at financial firms and the other would cap their size.
“When Paul Volcker talks, we should all listen. And I listen,” Bullard said. “And he's got exactly the right instincts. If you're taking deposits you should not be allowed to go to Las Vegas and make your bets. So, those instincts are exactly right. I think, to the extent you can make any criticism of that, it has to do with details about how would that actually work and would you actually be able to enforce this. But you should always listen when Paul Volcker talks.”
Bullard also said he worries the Fed could lose its independence and become more vulnerable to political pressure under some legislative proposals, such as on the passed the House that would increase audits of the central bank’s activities, including setting monetary policy.
“To go in that direction is going to induce a lot of volatility in the U.S. economy,” he said. “The economy is going to bounce around like crazy because every time there is political trouble, (politicians) are going to want to do something” about it through the Fed, he said.
He described the current position of the Fed as “arms-length from the political process” rather than fully independent, as Fed leaders are political appointees nominated by the President and approved by the Senate.
“It is politically accountable,” he said of the Fed.
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