The Chairman's New Clothes
New York – An article from BusinessDay
today sets out the conflicts between Congress, the Fed, the Administration and
the SEC over perceived new oversight powers being awarded the Fed. Senators
Dodd and Shelby of the Senate Banking Committee, sent a letter to Fed Chairman
Bernanke, SEC Chairman Cox and Treasury Secretary Paulson to take no action regarding
the Fed’s new powers until Congress reviews and approves them.
The cause to the issue is the $30 billion emergency loan
that the Fed gave to Bear Stearns in order to avert the investment bank from
going into bankruptcy. This loan is outside of the jurisdiction of the Fed,
since the Fed’s discount window is for commercial banks and not Investment
banks or securities dealers.
Paulson is a proponent of widening the Fed’s powers to
include monitoring investment banks, but this would clearly require congressional
consent . A new structure would allow
the Fed to monitor reserves, capital, liquidity and leverage of the commercial
and investment banking communities.
Congress feels that having the Fed as a backstop for the
investment banks might encourage a moral hazard. We wonder what happens to the
Fed funds market and the Repo markets. Will they become one? There are collateral issues related to this,
specifically who is holding the collateral. But in any case the spread between
repos and fed funds would at least converge.
Posted at 09:12 am by Thomas Hutchinson
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