While many people think of the Federal Reserve as an independent body set up by the banks to enrich themselves – and for the most part, it is – there are certainly ways to influence it in the proper direction. The best way is for Congress to threaten to take away much of its power.
That’s what Chris Dodd has done with his financial regulatory reform bill, which has received generally good reviews from the economist blogosphere, if not the ruling class. The heart of Dodd’s bill, where it differs from Treasury and the House, is to consolidate the current alphabet soup of agencies into a single bank regulator, taking away responsibility from the Fed. Dodd also envisions a new systemic risk regulator that would take that away from the Fed as well. He added a Consumer Financial Protection Agency, something that is also under the Fed’s current purview. The bill ends the literally insane practice of having the Fed’s district bank presidents approved the banks in the district, and moves that responsibility to Congress. And deep in the bill, it provides for an audit of the Fed, which Sen. Jeff Merkley (D-OR) describes this way:
Expanded authority for the GAO to audit the Federal Reserve so that taxpayer dollars in emergency lending programs are accounted for but that the Federal Reserve’s independent monetary policy and its role as lender of last resort are protected.
This provision would have tracked literally trillions of dollars lent by the Fed over the past year to various banks and institutions. The Fed would actually have to justify every expenditure to the various Congressional committees, with the identity of the recipient and the terms of the assistance. And the public would actually get access to this information, slightly delayed, at the Fed’s website.
So as a result, The Fed is going after the problem of overdraft fees, out of the clear blue sky.
The Federal Reserve on Thursday announced new rules that will soon limit the overdraft fees banks can charge their customers.
The new policy, which begins July 1, puts an end to the $25-or-more penalties banks can levy on consumers who spend more than they have. Buyers now will have to consent to those fees before banks can charge them — or they will lose the ability to spend even a penny more than their accounts contain.
This is an effort to show that the Fed is serious about consumer protection, but also it’s a priority of Chris Dodd’s in a separate bill, which would deal with the overdraft fee problem in a similar way, by making them an opt-in. The Fed’s policy actually goes further than Dodd’s legislation in some respects, though not in most. And at a time when Dodd is seeking to strip the Fed of many powers, it’s both a PR victory to put this out now and an attempt to keep Dodd at bay.
Now, Dodd is not satisfied with this move by the Fed. In a statement, he said:
“Giving customers the chance to choose whether they want ‘overdraft protection’ is important, but we need to do far more to protect customers from abusive bank products. We still need to stop the excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in these so-called overdraft ‘protection’ programs.”
It is likely that Congressional action will continue on this issue, despite the Fed lurching toward the populist end of things. But this does show that the independent board can be influenced by Washington.
Dodd’s bill is the biggest, but by no means the only, threat to the Fed’s power. Paul Kanjorski’s “too big to fail” bill would dismantle giant financial entities and reinstitute Glass-Steagall reform, though some see it as insufficient. And Bernie Sanders (I-VT)wants to give the Treasury Secretary one year to just break up the big banks (He has a petition to that effect here). The effect of breaking down the financial system on the Federal Reserve is undeniable.