Obama Is Tinkering with Changes to the Banking System While Big Finance Collapses

By Charlie Cray, AlterNet. Posted January 14, 2009.

For one, if we want strong regulators, we need to house them in public institutions. Just as Treasury Secretary Henry Paulson has suggested that Fannie Mae and Freddie Mac will fail if they have to serve two masters -- shareholders and the public, whose interests often conflict -- so many of the other institutions responsible for getting the economy back on track must be redesigned to more capably represent the public interest.

If we want to get beyond the ideological fixation with deregulation that so many (including Alan Greenspan) have finally acknowledged failed to keep the system from doing itself in, then we need to put our faith and support behind strong public regulatory institutions, instead of the now-discredited self-regulating organizations like the Financial Industry Regulatory Authority and the American Institute of Certified Public Accountants.

Another example of this is the credit-rating agencies, which essentially function as the government's surrogates. To make sure they certify investment-grade securities, they should be made public utilities or nonprofits. (The same thing should have been said about the auditing function, which was left with the accounting firms after Enron. Instead, they were left to form a cartel that is now pushing to insulate itself from any accountability through civil-liability caps.)

We need to recognize up front that the Fed is not, as currently designed, a purely public institution and therefore debate whether the Fed's authority for bank regulation should be expanded (in which case, it probably needs to be reformed to be more publicly accountable) or whether we need to come up with an alternative, like some kind of coordinating body responsible for allocating authority, smoothing interagency collaboration and preventing the kind of regulatory arbitrage witnessed in recent years by the shape-shifting financial institutions.

Either way, simply assuming that turning more power and regulatory authority over to the Fed would be to ignore a number of critical facts:

A) It wouldn't guarantee that the Fed will protect other interests besides the big commercial banks and bank holding companies. The Fed was never intended to protect the interests of consumers, homeowners or even shareholders (the Securities and Exchange Commission's job). As anyone familiar with the ways of Washington knows well, single institutions can have vicious internal policy fights, especially if different divisions represent constituencies whose interests can sometimes conflict. Anyone who believes the Fed should be charged with protecting homeowners might want to review its history of enforcement of the Community Reinvestment Act; anyone who thinks the Fed can clean up Wall Street might be forgetting how it helped block the regulation of derivatives when proposals were brought up in Congress. (To be fair, the SEC under Arthur Levitt and others were aggressively opposed to derivatives regulation, and their view may have held greater weight.)

B) The Fed is even less transparent than the SEC and other regulators (ever try to send a Freedom of Information request to the Fed?). The advantage of the Fed is that it is not publicly funded. But that's the disadvantage, too -- it's easy to imagine that it will claim (as it has in the past) that it is not a public agency, and therefore exempt from public oversight and control.

If you want an example of how opaque the Fed is, check out former House Financial Services staffer Robert Auerbach's, Deception and Abuse at the Fed, in which he describes how Alan Greenspan and other powerful Fed officials blocked Congress from providing oversight by falsely declaring -- for 17 years -- that it had no transcripts of its hearings.

Finally, there's an inherent and obvious conflict of interest at issue here: The fact is that the Fed is too intertwined with the big banks themselves to adequately regulate them. E.g. the majority (6 of 9 directors) of the governing boards of the regional reserve banks are selected by the banks themselves.

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Charlie Cray is director of the Center for Corporate Policy in Washington.

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