It is now a given that Congress will return to Washington early next year and, like switching on a light, pass new regulation to clean up and stabilize Wall Street.
The to-do list is long and growing, including hedge funds, derivatives, credit-rating agencies, the future of Fannie Mae and Freddie Mac, and a blueprint for monitoring and controlling systemic risk.
Veterans of past financial-market-regulatory wars wonder if all the horses and men of Congress can put Wall Street back together again.
Congress hasn’t exactly covered itself in glory.
“It scares the hell out of me,” said Bert Ely, a long-time observer of bank regulation.
The current market turmoil can be viewed as a child of the marriage of superficial regulation and financial industry lobbying.
“To a large extent the current crisis is the product of regulation and regulatory distortion. The last thing we should have is more of the same,” Ely said.
For instance, Congress gave Fannie Mae and Freddie Mac a free hand and tied their regulator in knots and starved it. Investment banks were able to ward off stricter regulation by the Federal Reserve. Hedge funds and derivatives — indeed a complex shadow financial system — was able to grow unfettered by supervision.
James Leach, the former Republican chairman of the House Financial Services Committee and now a professor at Princeton University, said campaign funds from financial services firms distorted regulation. Wall Street has had a “huge fund-raising role”.
“The Fed is the only one with the capacity to help in a crisis and they are the most non-partisan side of Washington,”
But the Fed hasn’t exactly covered itself in glory, either. Adam Posen, a scholar at the Institute for International Economics, said he was concerned about giving new powers to a central bank that has a history of a free-market ideology.
Former Fed Chairman Alan Greenspan never deigned to use the power that Congress had given him to reform the mortgage-lending industry and sub-prime mortgages. And the rest is history.
Leach admitted that this was a “dilemma.” Leach said the president can be held accountable because he appoints the Fed chair, Leach said.
But there will be some opposition to the Fed’s power grab.
The Securities and Exchange Commission would lose a lot of clout. “A lot of people will have problems with that,” Ely said.
The only good news is that nothing is likely to happen for six months, Ely added.
“When Washington acts quickly, they usually get it wrong,” he said. To make matters worse, bad law quickly develops powerful constituencies.
“Someone profits from bad law and they fight like hell to hang on to it,” he said.
For the moment, the Fed is in the ascendancy. But the agency should be careful what it wishes for.
Already, the central bank has taken actions — including rescuing American International Group — which will open it up to closer congressional scrutiny.
It may be gaining power and influence in short-term, but opens itself to closer examination in the long run,” Ely said.
This might be a tough price to pay for a central bank that treasures its independence