- NEW YORK, April 6 (Reuters) - Amid the wreckage of a broken U.S. financial system, the Federal Reserve is emerging as the chief overseer of an economic order that has yet to fully take shape.
Yet given the institution's opaqueness and its failure to prevent the current financial crisis, critics say the country would not be well served if the central bank were anointed as an all-powerful supra-regulator.
"I have intense concerns with the Fed as a regulator," said William Black, professor of economics and law at the University of Missouri, Kansas City. "Fed regulators have no power within the institution, and the institution is inherently hostile to vigorous regulatory action against the big banks."
Though the proposal to make the Fed the main systemic regulator is backed by key figures in Congress, including Financial Services Committee Chairman Barney Frank, analysts say there is plenty of reason to be skeptical of the U.S. central bank's supervisory prowess.
Some argue Fed policy was instrumental in stoking the housing bubble. Policy-makers not only kept interest rates at extreme lows for an extended period before raising them again in 2004-2006, but also suggested any speculative excess in housing was regional in nature and would not affect the national economy.
The Fed occasionally pointed to the systemic risks raised by the dominant position in the U.S mortgage market held by state sponsored mortgage banks Fannie Mae and Freddie Mac. But many analysts argue it also neglected some of its regulatory functions, allowing dangerous risk-taking to fester and looking the other way as signs of mortgage fraud mounted.
"There were obviously some significant lapses, so widening their regulatory authority isn't really what the system needs," said Conrad DeQuadros of RDQ Economics in New York, and formerly an economist at fallen investment giant Bear Stearns.
Banking giant Citigroup, for example, fell squarely under the Fed's regulatory domain. Yet it was allowed to take heavy bets on consumer credit, of a magnitude worthy of a hedge fund, including using off-balance sheet vehicles. These risks brought Citi to the edge of bankruptcy and required several doses of capital from U.S. taxpayers to keep it afloat.