June 19, 2009

Economic Outlook: The view from the Hill

The Obama administration's 85-page regulatory reform proposal has run into a scatter shot of resistance from U.S. senators on Capital Hill.

In a focused public hearing Thursday, Treasury Secretary Timothy Geithner faced members of the Senate Banking Committee, where Chairman Christopher Dodd, D-Conn., gave an initial endorsement that may prove prophetic.

I believe that we can find common ground in a number of the areas contained in your proposal, Dodd said.

But Senators from both sides of the aisle expressed concern about giving the Federal Reserve more power.

Geithner said the new role for the Fed would be a quite modest, building on authority it already wields.

Richard Shelby, R-Ala., countered that the Fed should concentrate on its task of monitoring inflation and economic growth, saying the Fed was not designed to carry out the systemic risk-oversight mission the administration proposes to give it. And Dodd expressed his own concerns over the relying on the Fed, which is frequently blamed after recessions for missing early cues.

In the aftermath of the greatest financial meltdown since the Great Depression, Dodd said giving more power to the Fed, is like a parent giving his son a bigger, faster car right after he crashed the family station wagon.

And it turns out Fed Chairman Ben Bernanke is not thrilled with the entire package, either, The Washington Post reported Friday.

Bernanke is expected to argue the formation of a Consumer Financial Products Agency, a popular concept on Capital Hill, will take away some of the Fed's leverage in dealing with banks, the Post reported.

The Financial Services Roundtable appeared to make the same point -- but perhaps for a different reason. Banks, which fear having yet another federal regulator going through their books, oppose separating the regulation of the entity from the regulation of the products, the lobby group said in a statement.

Geithner, however, argues the current crisis lacked one powerful agency with oversight over the financial system as a whole. Had the reforms been in place prior to the current financial crisis, banks would not have taken on so much risk, he said. Institutions that were not regulated banks would not have been permitted to take on that level of risk; consumers would have been less vulnerable to the kind of predation we saw, particularly in mortgage markets.

While investors will look for the debate to settle in the coming months, stock indexes in Asia turned up on Friday.

The Nikkei average in Japan gained 0.85 percent, while the Hang Seng index in Hong Kong rose 0.81 percent. The Singapore Straits Times rose 1.61 percent, while the S&P/ASX in Australia rose 0.19 percent.

In midday trading in Europe, the FTSE 100 in London rose 1.69 percent. The DAX 30 in Frankfurt fell 0.07 percent, while the CAC 40 in Paris gained 0.91 percent. The broader DJStoxx 600 gained 1.21 percent.