Can Bernanke keep power Greenspan amassed?
Thursday, January 26, 2006 7:13:36 PM
afxpress.com
WASHINGTON (AFX) - Over the past 17 years, Fed chairman Alan Greenspan used his stature and keen understanding of Washington power politics to amass and protect vast new regulatory powers for the Federal Reserve
Now it will be up to Ben Bernanke, whose only political experience before he came to Washington was six years on a local school board, to protect the Fed's position at the top of Washington's financial regulatory food chain
Although Greenspan is retiring on Jan. 31, he has not stopped protecting the Fed's turf. Indeed, in recent days he has stepped up his efforts by attacking proposals that might take Fed authority away if corporations are allowed to own banks and legislation that might soften federal oversight of housing agencies like Fannie Mae and Freddie Mac
In contrast with most developed countries where the central bank has responsibility only for setting monetary policy, the Fed has other duties under the nation's complicated system of financial regulation
The Federal Reserve shares responsibility over the U.S. financial system with the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, fifty state bank supervisors, the Justice Department, the Securities and Exchange Commission, the Treasury Department, the Commodity Futures Trading Commission and the National Credit Union Administration
Already there are calls for the Fed to cede some of the regulatory powers won by Greenspan, so the central bank can concentrate strictly on making monetary policy
It is a given in Washington that Bernanke will challenged in coming weeks by congressmen wanting the Fed to keep interest rates low in the run-up to the fall elections
But less visible, but very important for the Fed, are looming power-politic turf battles over who will regulate the cutting edge of America finance
Although analysts mean no disrespect to Bernanke, it is an open question inside the Beltway whether Bernanke has the political skills necessary to succeed
"We'll have to see how politically adept the chairman is. Clearly part of the chairman's success will be in maintaining the authorities and powers" won by Greenspan, said Ken Guenther, who headed the Independent Community Bankers of America for two decades
"Bernanke is an academic, pure and simple," said Tom Schlesinger, executive director of the Financial Markets Center, a non-partisan think tank that follows Fed policy
"What the long-term effect that has on the Fed as a political institution is one of those things we'll be watching closely. It's hard to tell where it is going to lead," Schlesinger said
Greenspan's skill As Greenspan departs from the stage, the Fed has never been in a more powerful position in Washington
"Greenspan expanded the power of the Federal Reserve in the supervision and regulation area across the board," said Guenther
During the twenty years it took Congress to tear down Depression-era laws that segregated financial services into separate industries, such as commercial banking, insurance, real estate and securities, the Fed emerged as umbrella regulatory authority over financial services holding companies
Experts say that Greenspan accomplished this feat with deft political skill. "Greenspan had the ability to create relationships which were very important to the Federal Reserve," said Michael Bradfield, a former general counsel at the Fed and now an attorney with Jones Day
Former Labor Secretary Robert Reich, who sometimes found himself on the other side of policy debates from Greenspan, said the Fed chairman understood power politics better than anyone in Washington Greenspan "could neutralize opposition before the opposition even knew it needs to be neutralized," said Reich, who served under President Clinton from 1993 to 1996
Part of holding power in Washington is "giving the appearance of being able to influence powerful others," Reich said. "Greenspan was at every official gathering, every cocktail party, and every dinner. And he let everyone know he was going to the next party with everybody worth knowing," Reich added
Former Fed official Bradfield is a big fan of Greenspan. He said the Fed chairman was not "some glad-hand guy doing people favors." Instead, his political success stemmed from his successful management of the economy
"Because he was so successful as a micro-manager of the economy, he was very influential on the Hill, particularly with Republicans," Bradfield said
This ability to grease all rails made everything much easier for the Fed, Reich said
"The press was almost always on his side, Congress was enraptured and presidents loved him," he said
Contrary to the popular image that Greenspan was a strong opponent of government regulation stemming from his days as a disciple of libertarian Ayn Rand, the Greenspan Fed did not always back deregulation, said Charles Calomiris, a finance professor at Columbia University
Greenspan only supported deregulation as long as it did not stir up political opposition to the Fed from Congress or the White House, did not harm large commercial banks, and did not undermine the Fed's competitive position versus other regulators, Calomiris said. Trouble for Bernanke Calomiris argued that Greenspan's victories have created political hot potatoes for his successor
For instance, the Fed may soon find itself in the middle of a fight between big banks seeking new powers to sell real estate and pressure from the powerful real estate lobby to forbid it
Under the law, the Fed shares with Treasury the authority to decide which activities qualify as permissible "financial" activities for financial holding companies
In addition, big consumer companies, like Wal-Mart , are interested in entering the banking business. The only loophole available to Wal-Mart would be to purchase an industrial bank
In a letter released Wednesday, Greenspan urged Congress to close the loophole that would let Wal-Mart and other commercial corporations to buy an industrial bank. If such a transaction were to take place, the primary banking regulator would be the Federal Deposit Insurance Corp., not the Fed
"This is a power battle between the Federal Reserve and the FDIC over the cutting edge of where banking is going," said Guenther
Primary oversight means "jobs and employment and power and authority" for the regulator, Bradfield said
Calomiris said the Fed has no business being in such political struggles
He said the United States should follow the global trend of removing regulatory authority from central banks, while allowing them greater independence over monetary policy
Many analysts don't see any imminent threat to the Fed's regulatory powers
Bernanke "inherits a fairly placid set of relationships with the executive branch and the legislative branch and an environment where there have been hardly any recent challenges to the Fed's prerogatives," said Schlesinger of the Financial Markets Center
Under the current Bush administration, the only truly powerful individuals are in the foreign policy sphere. The Treasury has almost no clout to challenge the Fed as an institution
In addition, Congress has also been fairly tame in recent years. The chairmen of both the Senate and House oversight committees are relative newcomers after No House Democrat has stepped up to inherit the mantle of former House Banking Committee chairmen Henry Gonzalez and Wright Patman, two progressive Democrats who regularly challenged the Fed
It was Gonzalez who forced the Fed to become more transparent in the 1990s when his staff uncovered secret transcripts of Federal Open Market Committee meetings going back to the 1970s
Robert Auerbach, a former top staffer for Gonzalez, said that Rep. Barney Frank, D-Mass., would conduct "serious oversight" of the Fed if Democrats are able to win back the House in this fall's congressional elections
Irwin Morris, a professor of government at the University of Maryland, and author of "Congress, the President and the Federal Reserve," said it would take a political sea-change before the Fed would be threatened by Congress
Fannie and Freddie can breath sigh of relief Analysts said that Fannie Mae and Freddie Mac will be able to breath a sigh of relief when Greenspan retires
Over the past two years, Greenspan has been a vocal proponent of restricting the amount of mortgage bonds that the two federally chartered corporations can keep in their portfolios. "Even if the policies do not change, Bernanke's comments on Fannie and Freddie will not carry the same weight as Greenspan," Guenther said
There are competing bills in Congress to strengthen federal oversight of Fannie and Freddie. The Senate version would restrict their portfolios, while a House bill would not
One of Greenspan's last official acts was to write a letter to Congress supporting the tougher Senate version of housing agency reform
Calomiris said a Federal Reserve that is losing political clout might become too risk-adverse
"There has never been a better time to rethink our bank regulatory structure, and to consider the advantages of removing regulatory authority from the Fed," Calomiris said |
