Limiting Fed Independence would impair economy in US 

(MENAFN - Khaleej Times) Federal Reserve Chairman Ben S. Bernanke said removing the Central Bank from bank supervision and tampering with its political independence would "seriously impair" economic stability in the US.

"A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions," the Fed Chairman said in a commentary released on Friday on the Web site of the Washington Post. The measures "would seriously impair the prospects for economic and financial stability in the US."

Bernanke has presided over the most expansive use of Fed powers since the Great Depression. While the 55-year-old Fed chairman has said he averted a financial meltdown, lawmakers have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantlement of Fed authority since the creation of the institution in 1913.

Bernanke's commentary is his first comprehensive answer to proposals in the House and Senate that would limit the Fed's supervisory powers and exert more political oversight in the setting of interest rates. The issues are likely to be discussed when he faces the Senate Banking Committee on December 3 for a hearing on his nomination to a second term as chairman.

"Congress has a lot of public support for an attack on the Fed," Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said in an interview on November 23. "They bailed out everybody in sight."

Lax Supervision
Senate Banking Committee Christopher Dodd, a Democrat from Connecticut, has criticised the Central Bank for lax supervision and introduced legislation this month that would strip bank oversight from the Fed and create a single bank regulator. Dodd would also limit the Central Bank's ability to loan to individual companies.

"There is a strong case for a continued role for the Federal Reserve in bank supervision," Bernanke said. "Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks."

The Fed chairman pointed to capital adequacy tests the Fed performed in May which helped restore confidence in the banking system. The Standard and Poor's 500 Financials Index has increased 34 per cent since May 1, outperforming the S&P 500 by about 10 percentage points.

Dodd and Representative Barney Frank, chairman of the House Financial Services Committee, want to take away the Fed's rule-writing power on consumer financial products and give it to a new Consumer Financial Protection Agency.

'Excessive Risk-taking'
"The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis," Bernanke said. The Fed has reviewed its performance and "moved aggressively to fix the problems," he added.

As the subprime mortgage crisis began to trigger losses in bank portfolios, Bernanke used emergency authority last year to purchase securities from Bear Stearns Cos. and facilitate its merger with JPMorgan Chase & Co.

The Fed chairman said that the government's actions, while in some instances "distasteful and unfair," were necessary to prevent "a global economic catastrophe that could have rivaled the Great Depression in length and severity."

Bernanke pushed the Fed's backstop lending beyond banks, setting up programmes to support the commercial paper and asset- backed securities markets. The Fed Board approved the bank holding company applications of Goldman Sachs Group Inc. and Morgan Stanley, giving them access to the Fed's loan window.