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Taming the Fed, Intelligently

The Chris Dodd proposal that has regulators and the Hill in an uproar (to say nothing of the banks) seems to contain the kernel of a very workable compromise. First the proposal, via the Journal:

It would create a single banking regulator, a powerful council of regulators to monitor systemic risks to the economy and a Consumer Financial Protection Agency to write and enforce rules on products such as mortgages and credit cards.

The proposal circulated Tuesday calls for curbs on the Fed's ability to offer emergency loans to individual companies, strips away virtually all of its bank-supervision and consumer-protection powers, and gives the White House and Congress some say in how the Fed's 12 regional banks are governed. ...

Mr. Dodd's bill would take away from private banks the power to choose regional Fed bank directors. Instead it would give that power to the Federal Reserve Board in Washington. It also would give the president the power to name the chairman of each regional bank board and the Senate the power to confirm each chairman.

In the category of things that don't have a real chance of becoming law: consolidating all bank regulation into a single, new entity, which would of course strip the Fed of its bank-regulating functions. (Now, that's not the same thing as saying this is a bad idea, about which I'm still agnostic. There are very bright people who argue that having multiple regulators lets bank shop for the weakest one; there are also bright people who argue that consolidation, as in the UK, hasn't produced stellar results. A mix of good and bad regulators may be better than one corrupt or incompetent one. Likewise, there are smart people who say the Fed's role as a bank regulator very strongly complements its ability to conduct monetary policy; on the other hand, Judd Gregg says that, too...)

Beyond that, though, Dodd's idea of having the Fed Board nominate directors, and the president nominate the chairman, of the regional Fed banks strikes me as a huge substantive and political improvement. Substantively, it's insane that big Wall Street firms get to choose the directors of the New York Fed, which is often their chief regulator. Politically, it's even worse--it only fuels suspicions that the Fed exists to serve the interests of big banks. If, by proposing to basically neuter the Fed, Dodd is able to compromise at preserving the Fed's regulatory role while reducing the influence of big banks, he will have accomplished a ton.

Click here to read Suzy Khimm on Dodd's unlikely liberal ally in his anti-Fed crusade.

P.S. Apologies for the light posting today. I'm closing a piece this week that's sucking up most of my time.