The Wall Street Journal reported that Congress likes Fed Chairman Bernanke, but not the institution that he heads. There is growing consensus that the Fed needs to be reformed and restructured. Most notably, there are calls to strip the Fed of its supervisory authority. In practice, the new sentiment reflects the failure of the Fed to rein in risk taking by the largest banks.
The Fed is pushing back. One reserve bank president said that removing the Fed’s supervisory authority “would affect our ability to conduct monetary authority effectively.” He went on to say that without the supervisory authority, the Fed wouldn’t know enough about risks brewing in the economy. This argument is shop worn. The Fed had the authority. It fueled the housing boom with its monetary policy and failed to head off the banking crisis with its supervisory powers. And let us not forget the regional banking crises of the 1990s; the fallout of the Latin American debt crisis for Citibank; and others (e.g., the failure of Continental Illinois National Bank). All on the Fed’s watch.
Around the world, some central banks have supervisory authority over banks and some do not. There is no clear pattern for either monetary policy or bank regulation with respect to how the powers are structured and distributed. Other factors seem to matter much more. It would be useful to identify what they are.
Congress is moving a few deck chairs around as the ship sinks. No fundamental rethinking of bank regulation is occurring. The Fed is probably being made a scapegoat for Congress’s own failings. But that is how Washington works.