Regulation Turf War

Fed Chairman Bernanke said in testimony earlier this week that the mixed roles of the Fed managing monetary policy, governing banks, protecting consumers, and the proposed monitoring of systemic risk and Tier 1 firms are complimentary. There are a lot of people who don’t agree:

Key regulators on Thursday broke with the Obama administration, reaffirming their belief that some new powers to monitor big institutions against financial threats should go to an interagency council, not the Federal Reserve.

Some Republican lawmakers also continued to warn against endowing the Fed with new powers in an overhauled system as Congress slogs through a complex deliberation that could reshape the financial landscape in the wake of a historic crisis.

But Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, head of the Federal Deposit Insurance Corp., stressed to the Senate Banking Committee that crucial role should be played by the new stability oversight council. The body would include the Treasury Department, the Fed, and the two independent agencies headed by Bair and Schapiro.

Classic turf war. And none of them see the big picture: that all these newly proposed powers are just going to make the system worse, codifying too big to fail policy, creating incentives for firms to take big risks with taxpayers as their safety net, and potentially turning many of the big financial institutions into de facto GSEs. Here come JP Morgan Mae and Citi Mac.