As world leaders meet to discuss the global measures required to regulate banks, one thing is certain: the United Stated Federal Reserve needs more authority to act more decisively over U.S. financial institutions.
The Fed has been accused, unfairly, of having contributed to the onset of the global financial crisis. One senator went so far as to compare the Fed to a teenager who had smashed a car, saying that giving the Fed more authority at this point would be tantamount to buying that same teenager a bigger, faster car as a reward.
Nothing could be further from the truth.
Had the Fed been given more authority in the first place, it is likely that this recession would have been far less damaging. The Fed's relative lack of authority is grounded in its original charter.
In the Fed's inception, Congress charged it with protecting depositors. Accordingly, Congress gave it authority to regulate deposit-taking financial services companies: namely commercial banks, but not investment banks, not rating agencies, and not mortgage brokers.
In the past decade, about half of all residential mortgages were underwritten by mortgage brokers, and it was largely that half that caused the subprime crisis that set this recession in motion. It is true that the Fed had the authority to promulgate standards for underwriting residential mortgages, and one could argue that it should have; however, even if it had, it would have had no way of enforcing them.
Sadly, the mortgage brokers weren't regulated by anyone, and certainly not by the Fed, largely because they didn't have depositors. If anyone should be held accountable, in my opinion, it would be Congress, for wanting to increase home ownership but not providing for anyone to regulate mortgage brokers. They should have given the Fed the authority to do that, at least a decade ago.
At this point, Congress should start by deciding what it wants to accomplish, before it starts reforming the regulatory system, particularly on a global scale. Protecting depositors should not be enough. A proper regulatory system should attempt to promote safety and soundness, throughout the system. The Fed could do that, if Congress gave it the authority to do so. And if it did, everybody would be better off, including depositors.
