In the aftermath of the AIG bonus scandal, most media outlets are focusing on Congress’ resistance to any more requests for bailout money from President Obama. But the nation’s newfound populism is forcing another political sea change on Washington: the push to turn the Federal Reserve into the next financial super-regulator, which I wrote about on Friday, is losing steam fast.
Here’s what we know so far … Congress plans to take up a dense and politically charged reform of financial rules later this year, and among the biggest questions is which agency should become the overall “systemic risk regulator” for Wall Street and the banks.
House Financial Services Committee Chairman Barney Frank (D-MA) has said in no uncertain terms that the Federal Reserve should have the job, but Senate Banking Committee Chairman Chris Dodd (D-CT) has long doubted whether the Fed is up to the task given its mishandling of the government’s AIG bailout.
What remains unknown is whether Treasury Secretary Tim Geithner and White House economic adviser Larry Summers — the former a Fed veteran and the latter a possible Fed-chairman-in-waiting — also agree that the Fed should become the super-regulator. Reuters reported earlier this month that Geithner would “likely” suggest expanding the Fed’s powers, but the AIG bonus scandal has severely eroded support for that move in Congress.
Even Frank is cooling to the idea he once embraced, as Bloomberg noted over the weekend:
A proposal to put the Federal Reserve in charge of market oversight is losing congressional support after its main backer, Barney Frank, said criticism over American International Group Inc. “undercuts” his proposal.
“There’s still a need for a systemic-risk regulator,” Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said yesterday. “The argument for the Fed alone has lost a lot of political support. I think that’s now got to be re-looked at.”
Both Dodd and his GOP counterpart on the Banking panel, Sen. Richard Shelby (AL), have spoken favorably of making the Federal Deposit Insurance Corporation (FDIC) the new super-regulator. Indeed, the FDIC may well have the cleanest hands in a regulatory sector that looks mighty sullied after the economic crisis began last year; a congressional investigation released last week uncovered systematic judgment failures at the Fed, the SEC, the OTS, and the OCC.
Geithner is due to reveal his views on regulatory reform during testimony before the House Financial Services Committee on Thursday. If he backs away from putting the nation’s central bank in the economic driver’s seat, that would bolster Dodd and Shelby’s position … and suggest that the AIG mess may have been a good thing for those who opposed consolidating power at the Fed.
