Treasury Secretary Timothy Geithner defended the administration’s proposal to give the Federal Reserve increased powers in his first public tussle with lawmakers skeptical whether the central bank is up to the job.
Advocating for President Barack Obama’s regulatory overhaul on Capitol Hill, the Treasury chief faced repeated questions from senators who cited previous regulatory failures at the Fed and potential conflicts with its monetary-policy duties.
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“The Federal Reserve is best positioned” to oversee the biggest financial companies, Geithner told the Senate Banking Committee in Washington, adding that the Obama plan gives the Fed only “modest additional authority.” Most central banks around the world have some responsibility for monitoring systemic risks, he said.
Obama’s plan calls for the Fed to monitor the biggest, most interconnected banks, sets up a new agency to oversee consumer financial products and brings hedge funds and private equity firms under federal supervision for the first time. The central bank, which supervised Citigroup Inc. and Bank of America Corp., has come under fire from some members of Congress for its secretiveness and lack of public accountability.
Banking Committee Chairman Christopher Dodd and the senior Republican on the panel, Richard Shelby, both said they were concerned that the Fed system, with its diffuse structure of district banks, would be ineffective in watching over companies deemed too big to fail.
‘Grossly Inflated’
The administration’s regulatory proposal “represents a grossly inflated view of the Fed’s expertise,” said Shelby, of Alabama.
Dodd, a Connecticut Democrat, quoted one critic’s view that giving the central bank more power was like awarding a son a “bigger, faster car right after he crashed the family station wagon.” He added that he hadn’t made a conclusion on the issue.
Geithner said that the Fed has “greater knowledge and feel for broader market developments” than any other U.S. banking agency. He added that giving those powers to a council of regulators wouldn’t work.
“You don’t convene a committee to put out a fire,” he said.
Senator Charles Schumer, a New York Democrat, said he is reluctantly coming to the conclusion that the Fed should serve as the systemic risk overseer even after its failures in protecting consumers.
‘Enemy of the Good’
“You cannot let the perfect be the enemy of the good here, or we end up with less,” Schumer said. “I tend to agree that the Fed is the best answer.”
Schumer separately faulted the administration for not being bolder in its overall plan, and called for considering a single regulator for the nation’s banks.
In his testimony, the Treasury secretary urged lawmakers to accelerate their consideration of the administration’s proposal.
“Every financial crisis of the last generation has sparked some effort at reform, but past efforts have begun too late, after the will to act has subsided,” Geithner said. “We cannot let that happen this time.”
Geithner is also scheduled to testify before the House Financial Services Committee this afternoon.
The president’s announcement yesterday marks the beginning of what promises to be a political battle that’s likely to alter the administration plan, with some lawmakers opposing any expansion of the Fed’s power. Obama, who has called the “sweeping overhaul” of regulation one of his top domestic priorities, said he wants to sign legislation by year-end.
