As frustration with Sen. Chris Dodd (D-CT) reaches a fever pitch, both on the Hill and among his home-state voters, it’s worth taking a step back and asking why some fellow Democrats left him to flail this week while they scrambled for cover from AIG anger.
Here’s one potential answer, gleaned from months of watching the still-evolving debate over broader financial regulatory reform: depleting Dodd’s political capital positions the Federal Reserve for a major increase in power by next year — handing a plum position to Larry Summers, who has long been tipped as the next Fed chairman. As the WSJ put it:
Mr. Summers is widely seen as having ambitions beyond his current job. He originally wanted to be Treasury secretary, several Democrats say. He has long been described as a possible chairman of the Federal Reserve — a job that could come open as soon as 2010, if Mr. Obama chose not to reappoint Ben Bernanke when his term runs out.
But why would kneecapping Dodd help those in D.C. who want regulatory power consolidated at the Fed?
Because as Congress debates where to situate a new “systemic risk regulator” (that’s Capitol-speak for “long-term protector of the financial system”), Dodd is openly questioning whether the Fed should have the job.
As Dodd explained yesterday during a hearing of the Senate Banking Committee, which he chairs:
Certainly, there is a case to be made for a so-called “systemic risk regulator” within [the existing] framework.
Whether or not those vast powers will reside at the Fed remains an open question. The Fed’s primary focus is on the conduct of monetary policy and its ever-ballooning portfolio and its expanding balance sheet which could reach $4 trillion. And that is to say nothing of its increasing number of responsibilities, and the obvious mistakes the Fed made in the run-up to the current crisis.
Chief among the Fed’s mistakes, in the eyes of its critics, was its mishandling of the original government takeover of AIG. Dodd went on to say yesterday, as he has on several recent occasions, that the Federal Deposit Insurance Corporation (FDIC) is a better choice to become the “systemic risk regulator” because it has a more solid track record on consumer protection.
Who disagrees with Dodd? House Financial Services Committee Chairman Barney Frank (D-MA), for one. He told the Wonk Room this week that the New York Fed, the longtime stomping grounds of Summers protege and Treasury Secretary Tim Geithner, is in the best position to become the “systemic risk regulator” that will heal the nation’s current economic wounds.
For a taste of the New York Fed’s record on consumer protection, just check out their impressive list of “Class B” directors — the ones specifically tasked with protecting the public.
It’s not clear whether Geithner and Summers agree that the Fed should become “America’s regulator-in-chief,” as the Economist puts it today.
But given Geithner’s history at the central bank, and Summers’ apparent vying for the chairmanship, it’s reasonable to suspect that they’d much prefer the Fed to the FDIC, where chief Sheila Bair has openly clashed with the new Treasury Secretary over remedies for the financial meltdown. And if you were looking to sideline the FDIC’s main champion in the regulatory reform debate, what better way to do so than to peg him as the No. 1 defender of AIG bonuses?
None of this is to say that Dodd is blameless; after all, he agreed to the Treasury Department’s request to modify his executive pay limits. Still, it’s one answer to the curious question of why one politically vulnerable senator had to play the villain this week.
