Federal Reserve "an abysmal failure" says Democrat Chris Dodd

by Rory Cripps | November 10, 2009 at 07:28 pm

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Senator Christopher Dodd (D-Conn.), chairman of the U.S. Senate Banking Committee, said today that the Federal Reserve has been "an abysmal failure" during his unveiling of legislation to overhaul U.S.financial regulations.

Dodd's 1,136-page proposed legislation is expected to face strong opposition from the Federal Reserve and U.S. banking regulatory agencies. Edward L.Yingling, president of the American Bankers Association, said Dodd's proposal "would tear apart the existing regulatory structure" and copy a model that failed in Great Britain during the financial crisis.

In February of this year, on Bloomberg Television’s “Political Capital with Al Hunt, Senator Dodd said that banks may have to be nationalized for “a short time” to help lenders such as Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years. “I don’t welcome that at all, but I could see how it’s possible it may happen. I’m concerned that we may end up having to do that, at least for a short time.”, said Dodd.

The Federal Reserve was created in 1913, by the enactment of the Federal Reserve Act, to serve as the central banking system of the United States. Ostensibly the Fed was set up in response to U.S. financial upheavals which occurred mainly as a result of a number of bank runs, .particularly a severe panic in 1907. Throughout the years, the Federal Reserve's influence over the nation's economy, particularly in regard to the nation's money supply and control of credit markets, has grown significantly.

The Federal Reserve has been roundly criticized throughout the years by economists and politicians. A major criticism is that the Fed lacks transparency in many of its transactions and that the economic data that it publishes (and which is relied upon as a gauge of the economy) is misleading, exaggerated, or altogether falsified.

The chairman of the Senate Banking Committee today unveiled his version of legislation to overhaul the nation's financial regulations, which sharply differs from the Obama administration's plan by proposing the creation of a single federal banking regulatory agency and stripping significant power from the Federal Reserve.

The 1,136-page proposal by Sen. Christopher Dodd (D-Conn.) is likely to be strongly opposed by the Fed and the three other bank regulatory agencies.

"The financial crisis exposed a financial regulatory structure that was the product of historic accidents, one after another, over the past 80 years, created piece by piece over decades, with little thought given to how it functioned as a whole, and unable to prevent threats to our economic security," Dodd said. "For decades, Washington has failed to deliver . . . substantial reform we need. If we fail again at this hour, our economy will be vulnerable to yet another crisis."

Dodd would give the government the power to seize and dismantle large financial firms that pose a risk to the economy, create a new Agency for Financial Stability to monitor the system for major risks, and impose new regulatory requirements on derivatives and hedge funds.

Dodd said the Fed has been "an abysmal failure" at consumer protection and bank regulation, but stressed that his proposals were not designed to punish the central bank. His plan would strengthen the Fed's independence in exercising monetary policy, Dodd said.

"You start loading up the Fed with additional responsibilities, and that independence can be threatened, in my view. And I think that would be a mistake," he said.

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a211423

at 19:36 on November 10th, 2009

Dodd said the Fed has been "an abysmal failure" at consumer protection and bank regulation, but stressed that his proposals were not designed to punish the central bank. His plan would strengthen the Fed's independence in exercising monetary policy, Dodd said.

This is an understatement, but I hope the Congress has the political will to make the changes that are necessary.

Rory Cripps

at 19:52 on November 10th, 2009

a211423: Thanks for the comment! When you get the time, could you post the link containing Dodd's statement about "consumer protection and bank regulation re. the Fed? Thanks!

Hugh Askew

at 20:01 on November 10th, 2009

Rory, do you have any ideas on how many times the "Federal Bank" has been redone since 1783? How many times the government has overhauled the banking system? Whatever it is they do, it seems to work very well, until the next time.

Rory Cripps

at 20:29 on November 10th, 2009

Hugh: Andrew Jackson did a number on the Bank of the U.S. But it took him into his second term to do it (I believe) and it was a constant battle. I think he had the right idea. I believe that there were 3 banks . . .but don't quote me on that. I'll have to check it out. My problem with the Fed is that there is no evidence to indicate that it has successfully accomplished any of its stated goals. And the goals have continued to expand since 1913. Now it's into "consumer protection". What the hell will it be into next year? JEEZ! When you get time some day, take a look at the history of the Fed--especially its actions leading up to the Great Depression. And after you read its history, take a look at all the charts on GDP, unemployment, inflation, and so on. I've yet to read a convincing article or see any convincing statistics which would serve to provide any sort of proof whatsoever that the Fed is a credible or effective institution. It almost makes me wonder if the conspiracy theorists didn't have it pegged all along. Time now to put on my tin foil hat! HA!

"The money power preys upon the nation in times of peace & conspires against it in times of war. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who even question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me & the financial institutions at the rear, the latter is my greatest foe.
- President Abraham Lincoln

nanute

at 03:00 on November 11th, 2009

The 2nd Bank of The US, had its charter revoked by Jackson's veto of congress' re-charter bill in 1832. Keep in mind that the Bank was privately owned. Jackson thought that depositing all of the Federal government's funds in one institution was not sound policy, and allowed the Bank to influence the political system with US funds.

Jackson's withdrawal of US Funds effectively "broke the bank." Government funds were then deposited in state and local banks that flourished under Jackson's change in policy. Economic expansion ensued, until Jackson's issuing of the Specie Circular in 1836. There was a growing concern that banks were lending in the form of notes, with no real collateral. The Specie Circular required all buyers of government land to pay in "specie." (silver or gold) Most of the state and local banks did not have enough specie to meet demand, and led to the collapse of many banks and some say was the main cause of the panic of 1837.

Yango (not verified)

at 23:02 on November 10th, 2009

It's very good to know that

George Washington (not verified)

at 01:06 on November 11th, 2009

What a clown. "The banks may need to be nationalized." Here's a novel idea, let em fail. I'm sick of the dollar getting crushed and the deficit skyrocketing so AIG execs can get bonuses. Dodd is as rotten as the bankers.

Hugh Askew

at 03:35 on November 12th, 2009

George, you are not alone with your novel idea. PIM has advocated for it for some time, as have i.

Our betters in DC know that failure of the big banks will lead to a collapse of the system. People have long memories for that sort of thing. Politicians generally don't like doing stuff that will lead to being un-elected.