Last Friday, with little fanfare, the Obama administration quietly released the text of its proposed “Investor Protection Act of 2009.” Modest in scope, this legislation will only be a sidelight to the Administration’s more controversial efforts to convert the Federal Reserve into a systemic risk regulator — an effort on which the debate also opened last week at an important joint hearing before the House Financial Services and Agriculture Committees. Although the Investor Protection Act promises much, it delivers little. Indeed, parts of this bill read as if the lobbyists wrote it.
In contrast, the administration’s efforts to give substantial additional powers to the already powerful Federal Reserve involve an important conceptual issue, but one that has encountered serious resistance in Congress. Some fear that the Federal Reserve is not sufficiently accountable; others, that it is too closely identified with the interests of regulated financial institutions to be their ongoing monitor; and still others fear that systemic risk regulation will either conflict with, or be subordinated to, the Federal Reserve’s primary responsibility for monetary policy and the control of inflation. This column will, first, examine the Investor Protection Act and, second, survey the debate over the Federal Reserve’s role. It will suggest that, to implement systemic risk regulation, a compromise must be found that either makes the Fed more transparent and accountable or uses another regulator with fewer enemies on Capitol Hill.
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