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Fed Presidents Band Together to Protect Bureaucratic Turf

One of the ongoing criticisms of the Federal Reserve is that, despite its expertise and mandate, it presided over the failing institutions and didn’t understand enough about the complex transactions that triggered this financial crisis — not to mention that it hardly has the best interests of the consumers of financial services at heart when conducting its oversight. But the call to consolidate the regulation of the financial services industry has led the various Federal Reserve Bank presidents to complain that they’ll lose power. They’re led in their efforts by Kansas City Federal Reserve President Thomas Hoenig, who addressed a letter to the Senate Banking Committee on Feb. 19 with some interesting claims.

“It is a striking irony to me that the outcome of the public anger directed toward Washington and Wall Street may lead to the further empowerment of both Washington and Wall Street in regulating financial institutions,” Hoenig said in the letter, written in response to lawmakers’ questions.

It’s an curious premise: If Americans are upset at Washington for not regulating banks stringently enough to prevent a financial crisis, they’ll be upset when Congress asserts its authority and regulates banks more stringently? St. Louis Federal Reserve Bank President James Bullard added his own criticisms of the plan on Feb. 25.

St. Louis Federal Reserve Bank President James Bullard told a business group that a plan for a multi-member financial system watchdog is unlikely to prevent a future crisis because it was unlikely to act decisively.

One of the major criticisms of the bailout is that the Fed and the Treasury Department acted too quickly to throw money at banks without proper oversight or control mechanisms, leading to a situation today in which many banks continue to make money hand over fist while refusing to extend credit or loans to struggling businesses. Hoenig followed up on his letter to the Senate on Feb. 26, when he claimed that the Fed needed to retain its full regulatory powers to keep up with the lives of regular Americans.

“I think that is a tragic mistake; it takes the eyes away from the Federal Reserve in knowing what’s going on in America.”

It’s amusing to think that the Fed needs to maintain its significant regulatory authority to keep up with what is going on in America, when its lack of involvement in what was going on in America helped lead to the subprime mortgage crisis. Today, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, added to the calls to keep his authority intact in a speech in Washington

.

“As long as the Federal Reserve is responsible for discount-window lending, it makes no sense to diminish the Fed’s robust role in the supervision of a range of banking institutions, from large to small,” Lacker said today in remarks to the annual conference of the Institute of International Bankers in Washington.

In other words, because the Fed loans money to banks and sets interest rates, it should be in charge or regulating banks because those two missions, somehow, inherently go together. To critics who find fault in the Fed’s protection of consumers, Lacker had an answer.

I think we do a really good job of consumer protection, if you look at our record, especially since 2007,” Lacker said. “We acted very rapidly to emerging information about risks to consumers in mortgage lending,” Lacker said. “Plus, putting it with somebody who’s doing safety and soundness regulation makes sense to me.”

Yes, because eventually the Fed realized that the banks over which it had regulatory authority were outright deceiving their customers, putting them in mortgages for which they were unqualified and doing it all for the purpose of securitizing the loans and earning money off of insurance against mortgage defaults, they should be the agency in charge of protecting consumers. All of the Fed presidents’ opinions square neatly with Fed Chairman Ben Bernanke’s statements that the Fed should keep, and even expand, its regulatory authority. Bernanke is even now promising to investigate the currency derivatives set up by Goldman Sachs to help Greece hide the true extent of its debt. Of course, Goldman started its relationship with Greece in 2001, and Greece is now in the midst of a financial meltdown, partly as a result of the swaps which allowed Greece to hide its debt. It only took the Fed nearly a decade and the collapse of an entire country’s economy to get it to think about investigating derivatives. They’re obviously ready to provide consumers with assurances about financial companies and the products they offer.

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