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Banking Perspectives by Gabrielle Sheshunoff

POV By Gabrielle Sheshunoff Bekink on 07/30/2009

Scary Movie

Thank goodness for YouTube. Its online accessibility has preserved Federal Reserve Inspector General Elizabeth Coleman’s utter inability to explain over $9 trillion in credit extensions and off-balance sheet transactions since last September to the House Financial Services Committee.  Committee attendance was sparse during Coleman’s testimony. Apparently, this was one horror show that few seemed to have had stomach for.

Rep. Alan Grayson (D-FL) was relentless in asking the Inspector General whether she was minding the store. And her truly scary answer seemed to be … uhh, not really. Grayson extracted a similar non-response from Federal Reserve Board Vice Chairman Donald Kohn last January when he asked for the names of the private entities that were benefiting from the taxpayers’ largesse.

One interpretation of this lack of oversight is that the numbers are just too big, too staggering to comprehend, even for the financial experts whose job it is to understand these things. Or is it more likely that the Fed just doesn’t want to tell us where the money is going because of what that would say about the sway of political pressure and economic clout in making these trillion-dollar decisions?  So we just wait in the dark on the edge of our seats, hoping for the best, but increasingly fearing the worst.

The alarming lack of transparency and independent oversight of the Fed’s own financial transactions with taxpayer bailout funds is disturbing by itself.  But the Obama administration’s regulatory reform proposal to vastly expand the authority of the Federal Reserve is even more troubling.  Making the Fed the regulator of all “systemically important” financial firms (read “too-big-to-fail”); payment, clearing, and settlement systems; and holding company subsidiaries (read “non-banks”) – especially given the Fed’s secrecy about its dealings so far – is inviting even greater potential for abuse of its power and stealth.

The global financial system has become monstrously complex and operates at the speed of light. How on earth can an agency that cannot even keep track of its own financial transactions be agile and sophisticated enough to rein in the dealings of enormous private conglomerates with tentacles that encircle the globe?  We might also want to think twice about concentrating more power in the Treasury Department as chair of a systemic risk oversight council.

Meanwhile, the heroes of this story — the thousands of financial institutions that operate in the full light of day, avoid risk, and tend to their communities’ needs — are left to contemplate another frightening plot twist. A separate consumer financial protection regulator would pile new rules on financial institutions that did nothing to break faith with consumers in the first place and are still lending as the crisis drags on. But that is an issue that deserves exploration on its own.

What should we be doing now? Frankly, we should all be contacting our elected representatives and letting them know that the rational among us find the ideas being proposed truly frightening. We ought to do everything we can to demand transparency and rewrite “regulatory reform” so that it does not concentrate power in the hands on an agency that is clearly becoming increasingly susceptible to political manipulation.

Austin Business Journal Link.