Two former U.S. securities regulators are urging the government to create a new body to regulate banks and not give such powers to the Federal Reserve.
The committee, led by former Securities and Exchange Commission Chairmen William Donaldson and Arthur Levitt, said the Fed's "credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitized products,” Bloomberg reported.
Congress is considering legislation that would enact President Barack Obama’s regulatory overhaul, the most sweeping change to financial oversight since the 1930s.
Backed by a group of pension funds, Donaldson's and Levitt's report might sway Democrats in Congress, especially those concerned that the central bank has too many conflicts and inadequate accountability.
Obama proposed that the Fed become the main overseer of firms whose collapse could roil markets, and bring hedge funds and private equity under federal scrutiny.
The plan would create an agency to monitor consumer financial products.. Treasury Secretary Timothy Geithner urged quick action by Congress.
“The Obama plan is a thoughtful exercise, but I think it’s deficient in terms of giving too much weight to the Federal Reserve Board and to the Treasury,” Levitt said in a Bloomberg radio interview today.
Fed oversight of monetary policy “may be at variance with the investor protection mandate, which is so much part of the program to bring back investor confidence.”
Levitt and Donaldson join a growing chorus of economists urging to keep the Fed out of any new regulatory bodies. In a letter to Congress, eight economists, including former Fed Governor Frederic Mishkin, said the independence of U.S. monetary policy is at risk, according to Reuters.
"Central bank independence has been shown to be essential for controlling inflation," the economists said in the letter to Congress. "Calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery."
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