Federal Reserve Chairman Ben Bernanke focused on the need for increased regulation and better risk management when he spoke at the Conference on Bank Structure and Competition in Chicago recently. A Medill Reports piece says Bernanke laid much of the blame for the subprime lending crisis with loan originators and their "loose standards."
If Treasury Secretary Henry Paulson's plan for regulatory overhaul in the financial industry is implemented, Bernanke and the rest of the Fed will take on more responsibility for policing banks' risk-management processes. Though legislators and others agree that additional regulation might be necessary, some, such as former Fed Chairman Paul Volcker wonder how far the Fed's new power should actually go.
According to Medill Reports:
Volcker called for a bigger, better paid Fed staff to help it keep up with its regulatory duties, but he pondered how much the Fed could be expected to supervise. "Just how far should the logic of regulation and supervision be extended?" Volcker asked in his testimony [before the Joint Economic Committee of Congress]. He also questioned whether Fed oversight of investment banks could lead to regulatory responsibility for hedge funds.
Cato Institute senior fellow Daniel Mitchell wonders whether the Fed is the appropriate entity to enforce the proposed plan, noting simply:
...the notion that some bureaucrat is going to know the right way to assess risk ... the government's not well suited to play that role.
Motley Fool contributor Chuck Saletta voiced the same opinion not long ago. He says the market can correct itself if we just give it time, and that the concept of Fed as "market stability regulator" won't work.