Fed’s ability to regulate questioned


NEW YORK TIMES: In wake of congressional hearings, the Federal Reserve is facing significant questions regarding its role in the finance industry.

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NEW YORK TIMES: In wake of congressional hearings, the Federal Reserve is facing significant questions regarding its role in the finance industry.

The issue is how the Fed will balance the conflicting roles it plays as an overseer of the banks, protecting them to ensure they operate successfully, and as a law enforcement agency charged with pursuing misconduct. At a hearing on Friday before a Senate subcommittee looking at how the Federal Reserve Bank of New York has dealt with Wall Street banks, the New York Fed’s president, William C. Dudley, said that his agency “is not like a cop on the beat.” Instead, “it’s more like a fire warden.”

The vision of the New York Fed ushering people out of the building during an emergency preparedness drill is unlikely to instill confidence among those who remain fearful of what the Wall Street banks can do to the economy when they ignore the rules. Reconciling the roles of regulator, the fire warden, and enforcer, the cop, is made more difficult because of how the Fed has traditionally acted. Gretchen Morgenson pointed out in the Fair Game column in The Times that the Fed “prefers to operate in a shroud of secrecy” in dealing with the banks. That approach is almost diametrically opposed to enforcing laws that rely on transparency to deter others from violations.

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