The creation of a new National Bank Supervisor and a new Consumer Financial Protection Agency will attract plenty of attention, but in some ways the big story of President Obama's 'New Foundation' plan (pdf) for overhauling the financial regulatory system is the big responsibility placed on the Federal Reserve. The agency already has its hands full fulfilling the goals it was given by Congress -- managing monetary policy "to promote effectively the goals of maximum employment, stable prices."
The "New Foundation" report says, "All large, interconnected firms whose failure could threaten the stability of the system should be subject to consolidated supervision by the Federal Reserve."
The catch is that, for an American government agency, the Fed is unusually independent. It's not funded by Congress, and its governors are not elected by the public. Rather, they are appointed for 14-year terms, during which they "may not be removed from office for their policy views." That can have advantages in insulating the Fed from political pressure, but it also can insulate the Fed from public accountability. Some argue that too loose monetary policy by the Fed helped cause the housing bubble. If you believe that, it may seem strange that an agency partially to blame for the financial crisis would wind up being vested with additional responsibility in its aftermath. For politicians, the independence of the Fed can be both a blessing and a curse. A blessing, because it offers the politicians someone to blame for problems other than themselves. And a curse, because there is little the politicians can do, other than fulminating at Congressional hearings, to affect the Fed's policies if they believe that its actions are bad for either the economy or their political careers, or for both.
The "New Foundation" report acknowledges that bind and suggests it should be up for discussion, giving the Federal Reserve itself the lead in suggesting how it should reinvent itself: "The Federal Reserve, in consultation with Treasury and external experts, should propose recommendations by October 1, 2009 to better align its structure and governance with its authorities and responsibilities." Those recommendations will be worth keeping an eye on.