WASHINGTON — Consensus is building in the Senate for legislation that would significantly weaken the Federal Reserve by stripping its power to oversee banks and hand that job to a single federal bank regulator.
The proposal by Senate Banking Committee Chairman Christopher Dodd, D-Conn., to merge federal prudential oversight into a single regulator differs from a plan by President Barack Obama. But Democratic aides say the proposal is gaining traction among Dodd’s colleagues, who think the Fed didn’t do enough to prevent the current market crisis.
Sen. Richard Shelby of Alabama, the top Republican on the banking panel, hasn’t publicly endorsed the deal, and a spokesman said he was still reviewing his options. But he has made no secret of his displeasure with the Federal Reserve.
“If you look at the record here of the failure of the regulatory bodies, all roads seem to lead to the Federal Reserve,” Shelby said.
Since its creation almost a century ago, the Fed has grown into a major power broker and guardian of the financial system. It plays various roles on the government’s behalf in protecting the economy, including the supervision of banks to ensure the “safety and soundness” of the financial system and enforcement of rules to protect consumers.
But the Fed’s primary mission is considered its role as the nation’s central bank.
As part of a sweeping reform effort in response to last year’s financial crisis, Obama has proposed empowering the Fed further by tasking it with deciding whether a financial institution has grown so big and overleveraged that its failure could bring down the entire economy.
But Obama would strip the Fed of its role in protecting consumers and create a separate government agency to enforce new rules on products such as credit cards and mortgages.
The idea of an emboldened new Federal Reserve isn’t sitting well on Capitol Hill, where lawmakers have little power over the central bank. While the Fed frequently reports to Congress, it maintains an independent status aimed at keeping politics out of the nation’s monetary policy.
