The Wall Street Journal reports that Timothy Geithner tongue-lashed Federal financial services regulators over their bucking the Obama Administration initiative for the Fed to become The One Regulator to Rule Them All. This comes on the heels of Congressional testimony which showed rather clearly that the key actors were not singing from the same hymnal.
This display of pique seems badly misdirected. I doubt that the show of disarray will make much difference in the outcome. Congress is engaged in a turf war against the Fed, justifiably unhappy with the Fed acting, as Willem Buiter put it, as quasi fiscal agent, effectively circumventing Congress’ control over budgetary purse-strings via stretching the TARP through various off-balance-sheet vehicles (from the Treasury standpoint). If Lyndon Johnson were still Senate majority leader, you’d have had a Constitutional crisis before things would have gotten this far. Congress was far more zealous about protecting its sphere of influence, but successive Presidents have managed to cut it down to size.
The question is whether Congress continues in its opposition. Given the trouble Obama is having with his big agenda item, health care, and the considerable unhappiness in Congress, and even to a degree in the electorate, over the Fed taking on tasks that legitimately call for more accountability, which the Fed refuses to entertain, it remains to be seen whether Congress will blink. I wouldn’t bet on it.
Obama seems unable to recognize he has pinned the fate of his presidency on two people, Geithner and Summers, who are part of the problem. The stillborn PPIP was a terrible idea. Paulson had two efforts on variants of the “buy toxic assets” idea and failed. The stress tests were a farce. The Potemkin reform plan puts more regulatory authority in the Fed, which was far and away, of all the regulators, least interested in supervision.
The only thing that the Treasury and Fed have succeeded in doing is cheerleading to get stock prices up so that banks could raise equity at not-hugely-dilutive prices. I spoke to a hedge fund manager yesterday who sees this rally as driven by technical and relative performance concerns, not supported by fundamentals. He is also not the first I have heard speculate that the media boosterism, particularly from sources not known for that sort of thing, like Bloomberg, suggests that official pressure has been applied to keep financial news upbeat. He thinks the markets, not just the bond market via Fed intervention, but even equity markets, are being used to try to goose the economy.
And if that fails and we have another downdraft, what successes will Geithner be able to point to? The canard of the banks repaying the TARP, when as Roger Ehrenberg points out, the warrants were massively underpriced? The only one is the goosing the markets exercise, and if that ends badly, it calls a lot else into question.
From the Wall Street Journal:
Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation….
Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.
Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.
Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.
Mr. Geithner, without singling out officials, raised concerns about regulators who questioned the wisdom of giving the Federal Reserve more power to oversee the financial system. Ms. Schapiro and Ms. Bair, among others, have argued that more authority should be shared among a council of regulators..
The government’s proposal would empower the government to take over and break up large financial companies, merge two bank regulators, and toughen oversight of mortgages, among other things.
Administration officials say they aren’t worried about the overhaul’s prospects, adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives. Treasury officials say they expected a big debate over the complex legislation. The first piece, which addresses executive pay, passed the House Friday.
“The industry is already back to their pre-meltdown bonuses,” said White House Chief of Staff Rahm Emanuel. “We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”
Neal Wolin, Treasury’s deputy secretary, said Mr. Geithner told regulators “they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal.”…
The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal.
Both men, however, have suggested the overhaul could change from Treasury’s proposal. Sen. Dodd favors giving extra powers to an oversight council rather than the Fed. Mr. Frank said Monday lawmakers were still working on a way to “make sure you have a sufficient broad base of participation and input” and “to make sure you have effective authority.”
He said the flap several months ago over the Federal Reserve’s role in allowing American International Group Inc. to pay large bonuses to employees “damaged the Federal Reserve politically.”
The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed.
“A rush to judgment where they basically throw these things together without any consensus is going to be a disaster,” Rep. Bachus said.