ShareThisSen. Chris Dodd of Connecticut, chairman of the Senate Banking Committee, has just proposed financial reform legislation that is enormous even by the bloated standards of our contemporary Congress. An alphabet soup of new agencies and arrangements are envisioned.
Most important, Dodd would end the relative independence in political terms of the Federal Reserve Board by expanding Senate influence in selecting members of the regional bank boards around the nation and requiring approval of their chairmen.
A new Agency for Financial Stability would separate the Fed from bank supervision, while simultaneously leaving responsibility for monetary policy in place. Proposing no change in accountability, while removing principal tools for ensuring compliance makes absolutely no management sense -- but is guaranteed to generate headlines. Dodd also targets the FDIC (Federal Deposit Insurance Corporation), which both insures and regulates banks. He would move regulatory responsibility to a new agency.
The senator also wants to freeze interest rates on credit cards immediately. This directly reflects understandable public anger at banks that have drastically increased such fees in the current recession.
Some of the suggestions no doubt have merit, but the very comprehensive nature of the senator's proposals will undercut effective evaluation. As the year draws to a close, Congress faces mountains of proposed legislation, especially the comprehensive health care initiatives.
Financial rule changes also frequently bring unintended consequences. For instance, last May Congress decreed that banks must give consumers advance notice before raising rates. To assist the banks, a 45-day grace period was added before this would take effect. In consequence, many banks rushed immediately to increase rates.
In the recent financial meltdown, Fed Chairman Ben Bernanke has provided aggressive and imaginative leadership. The Fed no longer controls the overall money supply, given very substantial dollar holdings overseas. Lowering interest rates to nearly zero to forestall total economic collapse has removed this second main lever of financial policy influence.
Bernanke quickly came up with other tools to attack the monetary meltdown. Funds were loaned directly to investment banks, and new forms of consumer credit relief have been developed. The Fed has pumped enormous amounts of money into the system, justifiable given the scale of the emergency.
The chairman has also actively promoted global cooperation, especially among the G20 rich nations, including financial swap agreements with central banks. Switzerland and other governments are cooperating in promoting financial transparency. Confronting Bank of America and other major financial firms has demonstrated courage and a commitment to managing private capital for the public good.
No doubt partly in anticipation of Dodd's proposed legislation, the Fed has just announced new regulations to protect consumers from overdraft fees on debit cards and ATM withdrawals. New limits have already been placed on mortgage and credit card lenders. This mitigates the traditional image of the Fed as aloof and focused only on the banking and related financial system as a whole.
Despite lengthy Senate tenure, Dodd faces a daunting reelection challenge next year. Close ties with large financial firms, and notoriety regarding a sweetheart mortgage arrangement with Countrywide Financial, have badly damaged his public support.
Chairman Bernanke, initially nominated by President George Bush, has been renominated by President Barack Obama for another four-year term. Dodd has quietly noted he anticipates the Senate will confirm Bernanke before Christmas.
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College and author of "After the Cold War" (NYU Press and Palgrave/Macmillan). He can be reached at acyr(at)carthage.edu. For more stories visit scrippsnews.com
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College. E-mail him at acyr(at)carthage.edu
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