Geithner’s Pitch: A Modest Approach

Written by John Clapp
on June 19, 2009 No Comments
Categories : From The Orb

his first opportunity to sell Congress on the Obama administration's plan[/b] for overhauling the financial regulation system, Treasury Secretary Tim Geithner testified before the Senate Banking Committee Thursday. At the heart of the debate were fears that expanding the Federal Reserve's authority to include managing systemic risk would detract from its primary duty of conducting monetary policy. Geithner's pitch included characterizing the Fed's expanded powers as modest, saying they built upon its existing authority. Leading up to the current crisis, the Fed's role was a "bad mix of responsibility without authority," Geither said. He also emphasized that while the administration's plan increases the Fed's authority, it removes certain responsibilities, such consumer protections rule making, and qualifies its ability to lend to institutions not under its supervision. When questioned by Ranking Member Richard Shelby, R-Ala., about who would ultimately be accountable to Congress for systemic risk oversight, Geithner replied, "The short answer is the chairman of the board of the Fed would be accountable, as he is now." Shelby, expressing a sentiment that was repeated by other committee members during the hearing, said he believed the administration's plan held a "grossly inflated view of the Fed's expertise." Geithner defended the plan by rejecting Shelby's suggestion that a new entity, whose sole responsibility would be to assess systemic risk, be created. Relative to any other entity currently in existence, the Fed has the deepest understanding of how payment systems work and a greater knowledge and feel for broader market developments, Geithner answered. Sen. Charles Schumer, D-N.Y., said that until he was shown a better example, he tended to agree that the Fed was best-suited for ensuring systemic stability. A council framework would be a formula for disaster, he added, and an entirely new entity would face a steep learning curve that the Fed would be able to avoid. Although Geithner repeatedly cited the Fed's "exemplary" record of keeping inflation low, numerous committee members, including Sen. Chris Dodd, D-Conn., noted the central bank's failure to make and enforce rules relating to consumer protections. "I only wish consumer protection had been more of a distraction for the Fed," Dodd told Geithner. Several senators lauded the administration's plan for its inclusion of a financial product watchdog. Dodd, who proposed a similar idea last week, held the Thursday edition of The Washington Post and angrily referenced an article about industry groups' criticism of a financial product safety commission. "What planet are you living on?" he rhetorically asked bank organizations. "The very people who created the damn mess are the ones arguing consumers ought not be protected." Dodd insisted that improving consumer protection be a "first principle and urgent priority" of regulatory reform. Geithner was also asked pointedly why the administration's blueprint dedicated a relatively small amount of attention to government-sponsored enterprises Fannie Mae and Freddie Mac. "Fannie and Freddie were a core part of what went wrong with the system," Geithner said before mentioning their move into conservatorship last year. "Frankly, we did not believe we could at this time, in this time frame, lay out a sensible set of reforms to determine what their role should be," he added. Whereas the goal of the administration's plan is to stabilize the financial system, the problems presented by the GSEs is more a question of "how the government reverses�the interventions taken so far," h

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