Federal Reserve in crosshairs, but many experts say hold fire (H.R. 1207)

WASHINGTON — Senate Banking Committee Chairman Christopher Dodd's sweeping new financial overhaul legislation, which proposes to strip the Federal Reserve of its authority to regulate banks, threatens the central bank's time-honored independence and its premier international standing, experts warn.

Critics counter, however, that the Fed pumped trillions of dollars into the economy to combat the recent financial crisis with virtually no direct authority to do so, and no effective oversight from publicly accountable branches of government. They argue that the Fed should be subjected to democratic checks and balances, just as other powerful arms of government are.

Under Dodd's proposed bill, the Fed would lose its power to regulate banks and to issue rules affecting mortgages and other forms of consumer credit. Dodd, D-Conn., would combine several existing bank regulators into a single new Financial Institutions Regulatory Administration.

That approach would be similar to Britain's Financial Services Authority, which guards against risks to the financial system and leaves monetary policy to the Bank of England, the British central bank. Dodd reasons that the Fed and other bank regulators didn't foresee the coming financial storm because they were too close to the banks they oversee.

Another sign of this is a bill by Fed critic Rep. Ron Paul, R-Texas, to have the Government Accountability Office — the auditing arm of Congress — audit the Fed's operations. That measure now has at least 307 supporters in the House and 30 or more in the Senate. Paul's book "End the Fed" is a national best seller.

The Fed's a convenient political target because many ordinary Americans are thirsty for revenge for the damage that Wall Street wrought on Main Street. Lawmakers are angry that the Fed acted largely without their approval last year when it brokered the sale of failed investment bank Bear Stearns and later engineered the rescue of faltering insurer American International Group.

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