WASHINGTON — President Obama's plan to increase the authority of the Federal Reserve is emerging as a major stumbling block to congressional approval of his overhaul of financial industry regulations.
The Fed already faces bipartisan criticism for being too powerful, overly secretive and negligent in protecting the economy from the severe recession. And lawmakers didn't let up on the agency in a hearing Thursday as Treasury Secretary Timothy F. Geithner began to sell the president's changes.
Obama wants the central bank to take on a key new job of regulating large financial institutions -- beyond only banking firms -- whose failure would pose a significant risk to the economy. But several members of the Senate Banking Committee pushed back on the idea of expanding the Fed's power.
"Your plan puts a lot of faith in the Federal Reserve's ability to spot risk and exercise its power to prevent the next crisis. However, if the Fed and other regulators had been doing their jobs and paying attention to what the banks and other firms were doing earlier this decade, they almost certainly could have prevented the mess," Sen. Jim Bunning (R-Ky.) said. "What makes you think that the Fed will do better this time around?"
Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and the committee's top Republican, Sen. Richard C. Shelby of Alabama, also told Geithner that they questioned expanding the Fed's authority because of its failure to detect the financial crisis.
In addition, they and other lawmakers are concerned that giving the Fed more of a regulatory role could impede its independence, which they say is crucial to keeping politics out of its responsibility for setting monetary policy.
The questions about the Fed's expanded authority highlighted the challenges Obama faces in getting his regulatory overhaul passed into law. The plan, the most comprehensive since the Great Depression, would institute tough requirements on large companies that could damage the economy should they fail, add oversight of such complex financial instruments as derivatives, attempt to rein in executive compensation and create a new agency to oversee consumer financial products.
Most of the key provisions, including changes to the Fed's powers, require congressional approval. And many members of Congress have called the Fed a prime example of inattentive regulatory oversight of the economy.
