Tags: Weidner | Fed | Wall Street | bank

MarketWatch's Weidner: Real Fed Reform Would 'Tamp Down Wall Street Influence'

By    |   Friday, 06 March 2015 07:40 AM

Plenty of talk has arisen about reforming the Federal Reserve in recent weeks, with Republican congressional efforts to audit the Fed garnering much of the attention.

So what are the crucial issues?

"The real hurdle for Fed reform isn't about unrealistic silliness such as shutting down the bank and returning to the gold standard, or symbolic measures such as opening the Fed to a congressional audit," writes MarketWatch columnist David Weidner.

"Real reform . . . is a structural reform that changes the Fed's mandates and, most importantly, tamps down Wall Street influence. Some moves might include adding the prevention of asset bubbles to the Fed's to-do list, or adding new regional banks in the West."

The New York Fed's authority should be reduced to curb the influence of Wall Street over financial markets and the economy, Weidner notes. The New York Fed is currently responsible for much of the overall Fed's banking regulation.

"Shaking up the Fed would take away Wall Street's influence over the markets and economy."

Meanwhile, Frank Partnoy, professor of law and finance at the University of San Diego, isn't too enamored with the Fed's proposed rules to boost bank capital.

"When the next banking crisis strikes, critics will look back and ask what went wrong. In answer, they will probably point to the Federal Reserve's proposed new rules on bank capital," he writes in the Financial Times.

The problem is a rule for the eight banks the Fed deems systemically important that requires them to have "an intricately calibrated quantity of extra capital," Partnoy explains. "The goal is a good one: reduce the likelihood of these banks defaulting on their debts."

But the result won't be pretty, thanks to convoluted rules, he states. "They will create incentives for banks to manipulate their financial statements, hide risks and engage in dysfunctional strategies — much like those that doomed Lehman Brothers and brought the financial system to the brink of collapse seven years ago."

The Fed has drawn complaints from economists across the political spectrum that its effort to make banks safer since the 2008-09 financial crisis hasn't improved matters at all.

The critics note that the biggest banks have only grown bigger since the crisis, perhaps making them even more "too big to fail" than before the crisis.

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Plenty of talk has arisen about reforming the Federal Reserve in recent weeks, with Republican congressional efforts to audit the Fed garnering much of the attention.
Weidner, Fed, Wall Street, bank
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2015-40-06
Friday, 06 March 2015 07:40 AM
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