QUOTEBOX-The Fed's new role in financial oversight

Fri Jun 25, 2010 6:05am EDT

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 June 25 (Reuters) - A landmark financial overhaul bill
hammered out by congressional negotiators would alter the role
of the Federal Reserve by giving it greater responsibility to
police the broad financial system as part of an interagency
Financial Stability Oversight Council.
 The Fed would also have a mandate to supervise risky
non-bank financial firms regarded as critical to the system.
 The U.S. central bank will be subject to greater oversight
from Congress, but it has largely avoided changes Fed officials
warned would erode its independence from political pressure.
 Following are views from prominent economists on how
regulatory reform will change the Fed:
 ANIL KASHYAP, PROFESSOR, UNIVERSITY OF CHICAGO'S BOOTH
SCHOOL OF BUSINESS
 "The success of the systemic regulation plan ... depends on
an unrealistic amount of cooperation across the new Council,
the Fed, the new office of financial research in the Treasury
and the other primary regulators.  I do not expect it to work
well and there is a risk the Fed will wind up being blamed for
a group failure.  I also worry that there are not enough tools
to adequately monitor and regulate the so-called 'shadow
banking system.'  Rules are going to be tightened for the banks
and this will push more activity into the shadow banking
system, making the lack of tools for regulating it a
potentially big problem."
 MAURICE OBSTFELD, PROFESSOR, UNIVERSITY OF CALIFORNIA AT
BERKELEY
 "The Fed's new macroprudential remit will codify a broader
view of the threats to economic stability than has often been
taken in the past. This healthy and necessary development is
not without cost. The Fed will have to articulate concerns that
may be more difficult to explain than a simpler calculus
involving near-term inflation and unemployment alone. Such
apparent ambiguities could open the door to stronger political
pressures."
 RICARDO CABALLERO, PROFESSOR, MASSACHUSETTS INSTITUTE OF
TECHNOLOGY
 "The Fed is the right institution to monitor macroeconomic
risks in the financial system as a whole, and it should remain
independent from political pressure. Regardless of any new
explicit mandate, central banks around the world are fully
aware that they need to pay much more attention to the systemic
risks buried in the complexity of the financial network and
innovation. Moreover, they also know that regardless of
regulatory efforts, crisis will repeat in the future and hence
it is important that they design new tools to support a
financial system once panic sets in. The conventional lender of
last resort facility is clearly insufficient in the modern
financial system."
 ALAN BLINDER, PROFESSOR, PRINCETON UNIVERSITY AND FORMER
FED VICE CHAIRMAN
 "The bill will clearly strengthen the Fed and add
substantially to its responsibilities. Its monetary policy
independence is no longer threatened ... thank goodness. The
Fed gets additional supervisory authority where bank holding
companies and systemically important non-banks are concerned.
It also will be given new responsibilities for monitoring
systemic risk -- as it should. This last will, I hope, lead to
the creation of a whole new division within the Fed staff in
Washington. In addition, the bill will require a tremendous
amount of work by the Fed's lawyers, and those at the other
regulatory agencies, to write specific regulations implementing
the new laws."
 MARK GERTLER, PROFESSOR, NEW YORK UNIVERSITY
 "Much to my surprise, it looks like Congress may be getting
things largely right. Giving the Fed central authority over
financial stability is vital for the long term health of the
economy. The Fed is the only institution capable of responding
quickly to a financial crisis. As such, it is critical that it
is able to monitor and supervise financial markets and
institutions. Limiting the Fed's role in this game would be
much like limiting the fire department's role in preventing and
fighting fires. I see the Fed's role in financial stability as
a natural evolution. Since the 1980s, financial instability has
increased in importance as a source of economic instability
across the globe, and central banks have been responding in
kind."
 GLENN HUBBARD, PROFESSOR, COLUMBIA UNIVERSITY AND FORMER
ADVISER TO PRESIDENT GEORGE W. BUSH
 "The Fed will need to beef up its ability to investigate
sources of systemic risk -- something it should already be
doing, but its very sanguine attitude at the onset of the
financial crisis suggests a need for improvement. To do its
job, it will also need to collect data from large non-bank
institutions, including very large hedge funds and insurers.
The danger is that the Fed has wandered into distinctly
political areas with the new authority. Indeed, the Fed's
expansion of authority in the recent crisis already potentially
compromised the independence of monetary policy."
 ALLAN MELTZER, PROFESSOR, CARNEGIE MELLON UNIVERSITY'S
TEPPER SCHOOL OF BUSINESS
 "Congress missed an opportunity to improve monetary and
financial regulatory policies. The Federal Reserve began life
under the gold standard. That restricted their action. We badly
need new restrictions that limit their monetary actions and
give them incentives to look over a longer term. Also ... we
need to ... end bailouts. Putting the secretary of the Treasury
in charge of decisions to prevent bank failures is a major
mistake."
 RANDALL KROSZNER, PROFESSOR, UNIVERSITY OF CHICAGO'S BOOTH
SCHOOL OF BUSINESS AND FORMER FED GOVERNOR
 "Drawing and monitoring the border between systemically
important and other institutions and markets will be one of the
greatest challenges the Fed will face. There will be strong
incentives for risky activities to migrate into the shadows
just beyond the border where they can pose serious dangers
through interconnections to the entire system. There is also
the potential for strong political push-back as supervisors try
to move into new areas to slow their growth."
 MARVIN GOODFRIEND, PROFESSOR OF ECONOMICS, CARNEGIE MELLON
UNIVERSITY'S TEPPER SCHOOL OF BUSINESS
 "Fed monetary policy must be operationally independent of
the fiscal authorities to anchor inflation expectations and
maintain price stability. Credible Fed independence requires
the support of Congress in two ways. Congress must accept the
priority for low long-run inflation. Congress also must clarify
the boundary of the Fed's independent credit policy
responsibilities so the Fed does not to invade the territory of
the fiscal authorities and jeopardize its independence. The
independent Fed cannot be the front line of fiscal policy
support for the financial system in times of stress. Regulatory
reform does little to address these potential ambiguities, and
so has not done enough to secure the foundation of credible,
independent central banking in the United States."
 (Reporting by Mark Felsenthal; Editing by Kenneth Barry)



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