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Marketplace Scratch Pad

At odds with Dodd

Scott Jagow Nov 10, 2009

Senator Christopher Dodd unveiled his version of financial re-regulation today. It’s 1,136 pages long, but I can sum it up in one, short sentence: The Fed, the FDIC and the banks won’t like it.

Those entities may support some of Dodd’s proposals, but probably not these:

Dodd wants to strip the Fed and the FDIC of their supervisory power over banks and create a single bank regulator called the Financial Institutions Regulatory Administration. It would have a board that includes the head of the FDIC and the Fed, plus three presidential appointees.

On the other hand, the Obama/Frank proposal wants to give the Fed more regulatory power and keep the FDIC’s responsibilities the same. Dodd agrees with the administration about creating a Consumer Financial Protection Agency. But Dodd’s idea of addressing Too Big To Fail is different. He wants to “unwind” dying giants. From Bloomberg:

Dodd’s plan for covering failures is at odds with an approach favored by Frank and FDIC Chairman Sheila Bair, who want to have companies pay into a fund before a collapse occurs.

“This pre-funded approach can assure that taxpayers will not once again be presented the bill for these failures,” Bair said today at a speech at a New York conference. “Building a resolutions fund balance in advance would also help prevent the need for imposing assessments during an economic crisis.”

Here’s the response from the American Bankers Association:

Sen. Dodd’s discussion draft… would tear apart the existing regulatory structure only to create a new one that would produce conflicts among regulators, undermine the state-chartered banking system, and impose extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis. ABA supports comprehensive reform, but not this reform…

“While there are key elements of the proposal we support, ABA opposes the creation of a single prudential regulator, which failed miserably in Great Britain and which would inevitably undermine the state-chartered banking system and be detrimental to community banks.

It looks like we’ll have to reconcile two things here: One camp that wants to keep things as much the same as possible while “re-regulating”, and a second camp that wants tear down the house and start building new bureaucracies. The answer, most likely, is somewhere in the middle. Both the Dodd and the Frank proposal still seem to be dancing around the TBTF problem. The Bernie Sanders’ bill I pointed out yesterday hits that nail on the head.

But I do like the idea of removing some of the powers the FDIC and Fed have “accumulated” over the years. Perhaps the FDIC should focus on insuring deposits and resolving bank failures, and that’s it. Perhaps the Fed should be in charge of monetary policy, and that’s it. Dodd say his bill is “not designed to basically punish the Federal Reserve but to enhance its independence.” Nicely put.

Many economists do not see it that way. From the Wall Street Journal:

By a 2-to-1 margin, economists said the U.S. shouldn’t adopt a system where financial regulation is separate from the central bank… “The Fed needs more, not less, access to the actual working of financial markets to set policy appropriately, and preserving their regulatory role is one way of them gaining that information,” said Diane Swonk of Mesirow Financial. The Fed sees it similarly.

Of course it does!

Here’s what the Treasury Department says, via the Washington Post:

“Chairman Dodd’s draft bill moves us one step closer toward comprehensive financial reform,” the Treasury Department said in a statement released Tuesday. “We look forward to working with the Chairman and his Committee in the coming weeks on a set of strong reforms to strengthen consumer protection, crack down on excessive risk-taking, and stabilize the financial system while protecting the taxpayer.”

Sounds good, but we all know it won’t be that easy. Read the Dodd bill’s highlights here, and if you dare, the whole thing.

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