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Fed playing games in resisting Treasury inquiry, critics charge Print E-mail
Thursday, 24 September 2009

By Ronald Fink

The Federal Reserve is splitting hairs in resisting the Treasury’s efforts to get the central bank to clean up its own act, according to some of its most vocal critics.

As Bloomberg reported earlier this week, the Fed has turned down Treasury Secretary Timothy Geithner’s request that it conduct a study of its structure and governance to make sure it serves the public interest.

The Fed reportedly rejected the request on the ground that it is independent of the executive branch of the government.

Critics conceded that point, noting that the request probably should have come from Congress, which legislated the Fed into existence in 1913. But the Federal Reserve Act allowed the banking industry -- not Congress -- to dominate the Fed’s governance through board majorities on the regional banks that make up the system.

Indeed, Bloomberg cited a July research note to clients from Lou Crandall, chief economist at Wrightson ICAP saying this aspect of the Federal Reserve was “the most worrying aspect of the current system.”

And with Congress under the banking lobby’s sway, the legislature is unlikely to do its job, critics contend.

“It seems to me what the Treasury is asking the Fed to do -- make sure it has the tools to execute its stability mandate and examine the governance issue -- is very reasonable,” Jane D’Arista, a former Congressional staff economist and now a research associate at the Political Economy Research Institute of the University of Massachusetts, wrote in an email to CFOZone. “Those are exactly the issues that the Congress should ask the Fed to study and report on.”

She added that “Fed reform is a critical aspect of restructuring the financial system to ensure it functions on behalf of the economy, not the banks.”

D’Arista also observed that the Fed’s close cooperation with the Treasury during the past year in bailing out failing financial institutions, coupled with its lack of Congressional oversight in prior years, has effectively “reversed” the original relationship between the Fed and its own regulators.

“Nominally the Fed is not independent of the Congress (that's constitutional) but of the Treasury,” said D’Arista, “except now when it seems reversed.”

And that may be a good thing, she added, because of the power of the banking lobby. “Cynics think that more oversight from Congress would increase Fed coziness with the banks since the Congress itself is so cozy with those institutions,” D’Arista explained. “Ideally, the Congress should ensure Fed independence from the institutions it regulates. But, then, it has ensured its own independence from that quarter.”

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