House Committee Questions Fed Member On Fed’s Expansion

By Learned Foote- Talk Radio News Service

On Thursday, the House Financial Services Committee questioned Federal Reserve Board Vice Chairman Donald Kohn regarding a proposal recently advanced by the Obama administration that would expand the powers of the Fed.

The Fed currently oversees monetary policy, and in 1977 Congress established that the agency’s objectives are to maximize employment and stabilize prices.

The expanded powers would grant the Fed the authority to oversee systemic risks to the financial system as a whole. Said Kohn, “the job of the systemic risk regulator would be to take account of those interrelationships, the markets and how they’re developing, and the institutions and how they fit into the markets, and look at the overall risk to the system, as well as the risk of the individual institution.”

He added that the Federal Reserve could fulfill this role.

Some Congressmen argued that the expanded powers could compromise the Fed’s responsibilities regarding monetary policy.

Rep. Spencer Bachus (R-Ala.) said that the House Republicans’ view of the Federal Reserve dramatically differed from that of the administration. “Republicans believe that the Fed’s core mission, and I stress this, is to conduct monetary policy, and that that will be seriously undermined if its supervisory responsibilities are dramatically expanded.” He suggested that the Fed could become a “permanent bail-out agency,” and its political independence could be compromised.

“We need to end the bailouts that the Fed I think has been instrumental in carrying out over the last eighteen months, and I mean the ad hoc bailouts of individual institutions.”

Kohn said “we do not believe that enhancements to our existing supervisory and regulatory authority proposed by the administration would undermine our ability to pursue our monetary policy objectives effectively and independently.”

Rep. Ron Paul (R-Texas), who has introduced a bill in the House to audit the Fed more thoroughly, expressed skepticism as to whether the Fed’s powers should be expanded. He said that the Fed needs to be more transparent, although Kohn argued that “our independence in the conduct of monetary policy is accompanied by substantial accountability and transparency.”

Congressman Al Green (D-Texas) asked the Vice Chairman how he would respond to those who argue that it is “risky to give the Fed this much power.” Kohn replied that the additional powers are “incremental…not a huge increase in our authority.” He emphasized that “for the authority we already have, we are held accountable.”