Bernanke Protecting Fed’s Regulatory Hammer

Published by clickbroker.blogspot.com.

Bernanke’s public argument for the Federal Reserve retaining regulatory authority in the face of failure hit a sandbar during this week’s Senate confirmation hearing. Bernanke only grudgingly conceded some misjudgments, but not any failures and certainly no change in policy from Greenspan’s bubble now and cleanup later theory of monetary policy. With virtually all of the regional Fed presidents and the money center banks backing him up, Bernanke was loath to give up any ground to Senators of either party.

Bernanke’s public arguments for retaining regulatory authority included the in depth knowledge gained and the technical skills developed by actually practicing in the field of bank supervision. Firsthand access to the detail gives the Fed a broader and deeper field of vision from which to draw conclusions on monetary policy.

Little substance can be drawn from Bernanke’s public argument. But, behind the public facade I imagine that the Fed chairman might have a more substantial reason for wanting to retain regulatory authority. I call it the hammer. While no one is proposing to limit the Fed’s access to consulting with commercial and investment bank executives, the level of honesty and quality of information provided might be skewed or compromised without the Fed’s regulatory hammer.

Bernanke never argues that the Fed has been or will be a better regulator than another federal agency. He cannot because the Fed has an inherent conflict of interest. Its job is to protect the banks and see that they are profitable enough to promote risk taking for sustained innovation and economic growth. Protecting the banks commercial and retail customers hurts profits, therefore it is not in the Fed’s or the banks best interest. Bubble creation and mop up are.

Regulation is primarily enforced by the Fed’s regional banks. Bernanke was dumfounded to give examples of when regulatory insight improved monetary policy decision making during his Senate confirmation hearing. Without regulation, the regional Fed banks would become primarily operation centers for payment processing and clearing, a level of diminished prestige.

Egos aside, it is obvious that the Fed had not and never intends to use its regulatory muscle for the protection of the banking system, their customers or even the US financial system. The question that legislators must grapple with is how large a hammer should the Fed be allowed to retain while structuring an effective independent (from the Fed) regulatory arm for consumers and systemic risk?

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