Fed Wins in Dodd-Frank

With the recent passing of the Dodd-Frank reform bill, the Federal Reserve has emerged as the primary regulator of the financial industry. Though the Fed has taken the punch for playing a major role in the financial collapse of 2008, Congress has voted to expand its powers over large banks and Wall Street firms, hoping this will prevent a future crisis. At a time when Americans are already skeptical of the Fed’s ability to manage interest rates and inflation, an increase of its oversight may only bring added blame if the economy, again, takes a turn for the worse. According to a Wall Street Journal article, certain industry experts believe that that could be a very likely outcome due to the failure of the bill to address the root causes of the crisis.

As in past eras of extreme price instability, Congress has once more given the Fed a greater role in the economy. Immediately after the Great Depression in 1946 and stagflation of the 1970s, the Fed was tasked with creating sustainable employment and a stringent monetary policy. In the current post-recession, the central bank will have greater decision-making power over the structure of complex, financial firms and also debit card fees, another hot-button issue, yet has managed to escape from a comprehensive congressional audit.

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The Fed has been charged with setting interest rates artificially low by inflating the money supply, giving the appearance of a booming economy. When the subprime bubble burst, millions of Americans were left struggling to pay back loans they could no longer afford as interest rates rapidly rose, triggering the onset of the financial crisis. Although, populist America called for an audit of how the Fed chose to set its rates, their demand will go unmet now that the Fed has succeeded in avoiding public disclosure of their processes.

The main criticism is aimed at the superficiality of the new bill. Though it is the most sweeping rewrite of financial rules since the Great Depression, many, nevertheless, argue the Dodd-Frank bill is not far-reaching enough. “Most of the attempted reforms are poorly drafted, or contain loopholes so large that a fleet of trucks could get past the supposed barriers...We couldn't respond to the crisis because of a lack of transparency in newly-created markets, products and services; a lack of economic monitoring and assessment by regulators,” accuses former SEC Chairman, Harvey Pitt.

Aside from expansion of the Fed’s powers, the bill does enact restrictions on its control over loan disbursement. The central bank is now

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required to appeal to the Financial Stability Council, which seats the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, to lend to almost anyone. The bill also limits loans to sectors of the economy rather than individual firms. However, the Fed has been given the authority to break up large companies posing a threat to the financial system and to force firms to boost their capital and liquidity when deemed necessary.

Unfortunately, the new legislation surrounding the division of big companies now makes the central bank a prime target for political controversies and lobbyists. Especially when trust in the Fed is at a low, further controversy could make it vulnerable to an onslaught of harsh criticism and blame.

Some may consider it illogical, but with the Fed taking the reign as the chief financial regulator, America will, inevitably, witness a more aggressive political back-and-forth between banks, consumers, and retailers in the time to come.