Treasury Proposes Broad New Powers for the Fed

Mar 29, 2008: 12:02 AM CST

According to the New York Times article today, the Treasury Department is proposing that the Federal Reserve receive bold new powers to stabilize potentially shaky financial markets.

Edmond Andrews reports that “The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.”

The move is done to unify the various governmental agencies that are charged with financial regulation with the goal being to prevent the kind of crisis that evolved from the “Credit Crisis” lending problems that have threatened global markets.

According to administration sources, “the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.”

According to a draft speech, Treasury Secretary Henry Paulson is expected to say “I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years [but] am suggesting that we should have a [more flexible] structure that is designed for the world we live in.”

While Congressional Democrats will likely be pushing for stricter governmental regulation, it will be interesting to see how the eventual changes take place, or if they will take place quickly or incrementally.

Critics will argue that this measure doesn’t go far enough to add stricter regulation, and others will argue that the changes will be far too strict.

I suggest watching the development of this story closely in the coming weeks and months, and what it might mean for institutions, hedge funds, banks, and other major financial institutions. There is no doubt this story will be covered from a variety of perspectives soon.

2 Comments

2 Responses to “Treasury Proposes Broad New Powers for the Fed”

  1. NTH Says:

    Hi again Corey,

    We discussed about the Bear Stearns rescue a week or so ago, which was an unprecedented move. The offer price from JP Morgan of 2 dollars has been increased to 10.

    But what is strange about this market intervention by the Fed, other interventions already carried out (eg new ‘windows’ of credit), etc, is that the Fed seems to be in a vary much ‘hands on’ role.

    It is arguable however whether this is creating new moral hazards which add to the long term woes and build on the moral hazards of mistakes in the recent past in the 80’s, 90’s, etc. People may ‘complain’ about what happened in the US in the 1930’s dpresssion, but moral hazard wasnt one of them, and it remains to be seen whether short-term ‘hald holding’ remedies will actually work out better than allowing the market to run its course even with its ills.

    What seems to be clear is that the Fed didnt want to ‘allow’ any other large US financial companies fall into non-US hands, such as what happened to a degree of ownership with Citigroup when it had its liquidity problem.

    The Fed is now saying that it is open for business. How this all plays out over the next 25 years only time will tell. But like sub-prime which was poorly contolled credit, it could be argiued that yet more poorly contolled credit is being introduced. All this credit binge will have to come to a slow down at some point.

    NTH

  2. Corey Rosenbloom Says:

    True, the Fed has changed its approach over the last decade or more to be more active in the markets. I also found the Citigroup development interesting when it happened.

    It’s going to have some repercussions, but they can’t be forecast accurately yet with the data we have now.

    It’s sort of like building immunity. Through little sicknesses here and there, we build up our body’s natural immunities, but if we try to prevent ourselves from being sick, then we fall victim to a ‘superbug’ that we would have fended off had we just been sick a little bit every once in a while. That may be a bad analogy, but the notion is that it’s ok to have setbacks because we learn from them. Without setbacks, we won’t learn (the economy) and so something major could have damaging effects that could have been prevented.

    Oh well. We’ll see.