Bid for Power By Bernanke Aimed at N.Y.
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

Federal Reserve Chairman Ben Bernanke is outlining plans that would give him broader regulatory powers over the big New York-based financial institutions that are not connected to commercial banks — Goldman Sachs, Merrill Lynch, Morgan Stanley, and Lehman Brothers.
The effort is aimed at preventing another emergency bailout of a bank on the verge of bankruptcy like the Fed’s quasi-rescue of Bear Stearns, another New York-based institution that was bought by JPMorgan Chase at a bargain-basement price with the Fed providing a $30 billion backstop.
RELATED: ‘Bernanke’s Speech: ‘Financial Regulation and Financial Stability’ | Bernanke’s Power Grab.
Mr. Bernanke argued for a stronger central bank in a speech yesterday. He said the Fed was already playing such a regulatory role in New York under an agreement with the Securities and Exchange Commission, which had responsibility for the nonbank firms before the Fed stepped in. “Federal Reserve examiners are in place at the four investment banks,” Mr. Bernanke said, speaking of the need to counteract “instability in our financial system,” which he said could affect even investments that had been thought to be safe, such as money-market mutual fund accounts.
Observers said Mr. Bernanke’s speech was a move to influence future congressional legislation and distract from the agency’s inability to stem Wall Street’s difficulties. Mr. Bernanke, who contrasted the Fed with other central banks that have greater powers to control the markets, said correcting this lack of oversight would be key in preventing an economic crisis in the future.
Some said the Fed already has adequate authority to control the market and failed to exercise it. Moreover, Mr. Bernanke’s bid yesterday to achieve new powers was an implicit defense of his failure to anticipate the market’s slowdown with the tools already at his disposal, they said. The Fed is also already struggling to fulfill its current mandate of maintaining price stability and promoting maximum employment.
The Fed “thinks more regulations are coming, and they are trying to get out in front of it,” a principal economist at Dallas-based Econtrarian, Michael Cosgrove, said. He said the speech, which was given in Arlington, Va., to a forum of the Federal Deposit Insurance Corp., was “an attempt to cover up” the agency’s failures to stem Wall Street’s problems.
In the speech, Mr. Bernanke said, “A strong case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.” He laid out his argument by comparing the Fed with central banks elsewhere, noting, “Most major central banks around the world have an explicit statutory basis for their oversight of payment systems, and in recent years, a growing number of central banks have been given statutory authority to oversee securities settlement systems as well.”
The Fed was far from the first to raise the alarm over the housing bubble or the dangers in the subprime market. “Lots of people were aware that there were problems,” a senior fellow at the Milken Institute, James Barth, said of those who predicted the market’s vulnerabilities before they materialized. But the Fed had not been active in expressing concerns others had detected until those concerns had become obvious problems.
“They have huge analytical capabilities at the Fed,” Mr. Cosgrove said. “Those people either didn’t do analysis on what was going on in the housing market or they did, and couldn’t talk about it.”
The prospect of the Fed taking on additional regulatory responsibilities has also generated concerns that the Fed’s mandate may become dangerously overextended. “The soundness of a central bank varies inversely with the breadth of its mandate,” the editor of Grant’s Interest Rate Observer and a prominent critic of the Federal Reserve, James Grant, wrote recently. The Fed is already responsible for ensuring price stability and promoting maximum employment. As commodity prices spike and unemployment figures grow, the Fed’s twin mandate is proving to be no small challenge. Now the Fed is courting the responsibility of actively regulating the behavior of private institutions.
If the Fed’s mandate is extended in the manner laid out by the chairman yesterday, Mr. Barth said, the Fed could become “responsible for just about everything that goes on in the financial markets.”
Others, however, said the Fed has no other choice but to expand its responsibilities. A senior fellow at the American Enterprise Institute and former director of the Federal Reserve Board’s Division of Monetary Affairs, Vincent Reinhart, said Mr. Bernanke’s assessment of the regulatory difficulties the Fed is facing was spot-on. “The Fed has been given responsibility without authority, and that always fails,” Mr. Reinhart said, explaining that the Fed has long been effectively charged with preventing a systemic financial crisis while lacking the authority to forbid private institutions from taking the sorts of risks that could create it.
Since the Federal Reserve demonstrated when it bailed out Bear Stearns last year that it would protect financial institutions, the Fed now needs more regulatory controls to “roll back the moral hazard it extended,” Mr. Reinhart said.
Still, while Mr. Reinhart sees the expansion of the Fed’s role as necessary, it is far from ideal. “It would be nice to have figured something else out, something more efficient,” he said. “But this is the world we’re stuck with.” Since the Fed can’t remove the moral hazard it has created because, after all, “actions speak louder than words,” there is nothing to do but expand its powers.
Mr. Bernanke himself warned of the moral hazard in his talk, saying, “attention should be paid to the risk that market participants might incorrectly view the Fed as a source of unconditional support for financial institutions and markets, which could lead to an unacceptable reduction in market discipline.”