US TREASURY secretary Timothy Geithner met immediate resistance to his regulatory reform package on Capitol Hill yesterday, at the start of what promises to be a lengthy sales pitch to protect the White Paper from critics in the US Congress.
At a Senate hearing, Mr Geithner defended his proposal to grant systemic risk regulation powers to the US Federal Reserve, an issue that is vulnerable to being overturned by sceptical lawmakers.
“You cannot convene a committee to put out a fire,” he told the Senate banking committee, insisting that the Fed was the best body to guard against risks in a large institution that could pollute the entire financial system.
The Fed’s new role as systemic risk regulator will be supplemented by a council of regulators, according to the reform plan, but Mr Geithner and Lawrence Summers, chief economic adviser to US president Barack Obama, are determined that the real power resides with the central bank. “I think they’ve got the best incentives to make sure those basic safeguards are strong enough to help us withstand future crises,” said Mr Geithner.
Richard Shelby, senior Republican on the committee, said the proposals presented a “grossly inflated view of the Fed’s expertise”. David Vitter, a Republican from Louisiana, said new accountability placed on the Fed was “really crossing a line” in compromising the bank’s independence.
Some Democrats have also argued that the Fed should concentrate exclusively on monetary policy. Opposition to a proposal that the government have the power to seize and wind up a failing institution is another problem for Mr Geithner.
The Senate is set to be the main stumbling block to passing the reforms. The House of Representatives is more divided on party lines with most of the dominant Democrats happy to proceed quickly.
“Every financial crisis of the last generation has sparked effort at reform, but past efforts have begun too late,” Mr Geithner said. “We cannot let that happen this time.”
He said the Fed was “best positioned” to regulate systemic risk.
“It already supervises and regulates bank holding companies, including all major US commercial and investment banks. Our plan gives modest additional authority – and accountability – to the Fed to carry out that mission. But it also takes some authority away.”
Mr Geithner is proposing to divest the Fed’s consumer protection role and give it to a new consumer financial protection agency. – (Copyright The Financial Times Limited 2009)
