06.28.10

Financial Reform Bill, Part 4

Posted in Financial Markets, Politics and Policy at 8:40 pm

In this post I’ll address Section umm, I’m not sure what number to give it since it was excluded from the summary paragraph, entitled, “REFORMING THE FEDERAL RESERVE”.

Federal Reserve Emergency Lending: Limits the Federal Reserve’s 13(3) emergency lending authority by prohibiting emergency lending to an individual entity. Secretary of the Treasury must approve any lending program, programs must be broad based, and loans cannot be made to insolvent firms. Collateral must be sufficient to protect taxpayers from losses.

This is an almost verbatim repeat from a previous section.

Audit of the Federal Reserve: GAO will conduct a one-time audit of all Federal Reserve 13(3) emergency lending that took place during the financial crisis. Details on all lending will be published on the Federal Reserve website by December 1, 2010. In the future GAO will have authority to audit 13(3) and discount window lending, and open market transactions.

This provision resulted as a compromise from months of wrangling between those who wanted the Fed to be subject to ongoing audits and those who wanted Congress to leave the Fed alone.

I’m fairly neutral on this one, though I do NOT want Congress meddling in open market operations, via audits or otherwise. The Fed overstepped its bounds during the crisis, and should expect greater oversight now as a result of that, but monetary policy proper is an area where central bank independence is absolutely paramount.

Transparency – Disclosure: Requires the Federal Reserve to disclose counterparties and information about amounts, terms and conditions of 13(3) and discount window lending, and open market transactions on an on-going basis, with specified time delays.

I’m torn on this one. There is something to be said for maintaining the confidentiality of transactions with troubled institutions to avoid spreading panic. On the other hand, there has to be some limit to that, from the standpoints of scope and timing. Everything can’t be secret forever.

Supervisory Accountability: Creates a Vice Chairman for Supervision, a member of the Board of Governors of the Federal Reserve designated by the President, who will develop policy recommendations regarding supervision and regulation for the Board, and will report to Congress semi-annually on Board supervision and regulation efforts.

Establishing a Vice Chairman, appointed by the President, gives us what exactly over just having a Chairman, likewise appointed?

Federal Reserve Bank Governance: GAO will conduct a study of the current system for appointing Federal Reserve Bank directors, to examine whether the current system effectively represents the public, and whether there are actual or potential conflicts of interest. It will also examine the establishment and operation of emergency lending facilities during the crisis and the Federal Reserve banks involved therein. The GAO will identify measures that would improve reserve bank governance.

It definitely makes sense to look at the organizational structure of the Fed and identify areas for potential improvement. This is one of the cases where commissioning a study to analyze the issue and make recommendations makes more sense than just making an arbitrary change right now, like establishing a Vice Chairman.

Election of Federal Reserve Bank Presidents: Presidents of the Federal Reserve Banks will be elected by class B directors – elected by district member banks to represent the public – and class C directors – appointed by the Board of Governors to represent the public. Class A directors – elected by member banks to represent member banks – will no longer vote for presidents of the Federal Reserve Banks.

The office of FRB President, the procedures for electing them, and the candidates for the job are all pretty arcane. I don’t see how the “public” is going to be “better represented”, whatever that might mean, by this change.

Limits on Debt Guarantees: To prevent bank runs, the FDIC can guarantee debt of solvent insured banks, but only after meeting serious requirements: 2/3 majority of the Federal Reserve Board and the FDIC board determine there is a threat to financial stability; the Treasury Secretary approves terms and conditions and sets a cap on overall guarantee amounts; the President initiates an expedited process for Congressional approval.

This too is an almost verbatim repeat from a previous section.

Overall, there’s not much substance here. It seems to be more of a response to the “do something about the Fed” contingent, most of whom know little to nothing about the Fed beyond what they may have read on a conspiracy theory web site.

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