The Obama administration faces an uphill battle selling its plan for the Federal Reserve to regulate Wall Street's "too-big-to-fail" firms, the first hearings on Capitol Hill demonstrated.
Tim Geithner, the Treasury Secretary, was grilled about the increasing influence of the US central bank by lawmakers who want it to be subjected to much greater political oversight, or who worry it may be unable to cope with its proposed new role.
Beefing up the Fed's powers to regulate the financial system as a whole was the central plank of the administration's reform plan, unveiled on Wednesday. The aim is to provide an early warning system for problems and practices that threaten to bring down the financial system, and to prevent a repeat of the credit crisis of the past two years.
A top tier of "systemically important" firms will fall under the expanded remit of the Fed, which will be able to impose higher capital requirements and other restrictions on their activities.
The Federal Reserve has become ever more deeply enmeshed in the operation of the financial markets as the credit crisis has progressed, lending money to prop up the insurer AIG and working on rescue packages for other investment banks. Its growing role has attracted great political scrutiny.
At a hearing of the Senate banking committee yesterday, the Republican committee member Richard Shelby signalled his opposition to using the Fed to oversee systemically important firms, on top of its other responsibilities. "I personally believe this represents a grossly inflated view of the Fed's expertise," he said. "I don't think we can expect the Fed or any other agency can play so many roles."
The criticisms of the Fed are manifold. Other sceptics on Capitol Hill blamed the Fed for inflating the housing bubble that contributed to the crisis; still more are concerned that an expanded regulatory role could compromise the independence of the central bank and open the door to political manipulation of monetary policy.
Senator Jim Bunning said the Fed had already failed in its more modest regulatory role in charge of monitoring bank lending practices. "It took 14 years for the Fed to write one regulation on mortgages that we gave them," the Senator said. "What makes you think the Fed will do better this time around?"
Mr Geithner's strategy in selling the new powers for the Fed was to describe them as "modest" under questioning yesterday.
The administration had already tried to assuage concerns by imposing a "council of regulators" over the top of the Fed. The body will be run out of the Treasury and take input from the rest of the patchwork of financial regulators, most of which remain intact. The council will be the formal monitor of systemic risks and will make recommendations to the Fed on how to act.
But Mr Geithner defended the choice of the Fed as the regulator to oversee systemically important firms, saying "it has a greater knowledge and feel for broader market developments than is true for any other entity".Reuse content