Federal Reserve Chairman Ben Bernanke called for a stronger central bank last week, and outlined a proposal that would provide the Fed with more regulatory control over large New York-based financial companies that are not associated with commercial banks, like Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers.
The purpose of such a plan would be to avoid another emergency rescue that occurred earlier this year when Bear Sterns was on the verge of bankruptcy.
A strong case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems, said Chairman Bernanke.
Most major central banks around the world have an explicit statutory basis for their oversight of payment systems, and in recent years, a growing number of central banks have been given statutory authority to oversee securities settlement systems as well, Bernanke added.
Bernanke argued that the Fed currently functions in similar regulatory role in New York, and the Fed is merely attempting to be proactive regarding any future instability in our financial system. This economic insecurity could even affect investments previously thought to have relatively low risk, such as money market mutual funds.
Correcting this lack of oversight would be crucial in order to avoid similar economic problems in the future, Bernanke said. However, some critics feel that the Fed may not be able to handle the additional responsibility.
Others, like the former director of the Federal Reserve Boards Division of Monetary Affairs, Vincent Reinhart, told The New York Sun that the Fed has no other choice but to do so.
It would have been nice to have figured something else out, something more efficient, but this is the world were stuck with, Reinhart concluded. The Fed has been given responsibility without authority, and that always fails.