Fed up

“NO ONE is happy,” says Paul Volcker, a former chairman of the Federal Reserve, referring to the chaotic, overlapping and unaccountable sprawl of government agencies regulating America’s financial institutions. This week a group of wise men he assembled released a plan to reshape it. He would like to abolish one agency, merge some others and provide some checks on the growing power of the one he used to run.

Mr Volcker concedes that the odds are against him. Since the second world war, he says, more than 25 attempts to overhaul the regulatory shambles have failed. Politicians, alas, tend to respond to flaws by creating new bodies, without abolishing the old ones. The Dodd-Frank reforms adopted in 2010 in response to the financial crisis, for example, created a new consumer-protection agency and a new committee to monitoring financial stability.

Dodd-Frank also gave more power to the Fed, expanding its role in bank supervision in particular. The Fed has become more involved in markets too; efforts to revive the economy through asset purchases hugely expanded its balance-sheet. Complaints about its meddling are legion.

In a small country, Mr Volcker says, a central bank can take responsibility for monetary policy, the drafting of regulations and the supervision of financial institutions. But he does not think that will work in America. The Fed, he fears, will become too unwieldy and too powerful.

Instead, he would largely confine the Fed to monetary policy and the drafting of new financial regulations. Supervision would be the responsibility of a separate entity, although the vice-chairman of the Fed would head it. To streamline oversight of financial markets, the Securities and Exchange Commission and the Commodity Futures Trading Commission, which patrol different bits of them, would be merged—a suggestion that seems prescient in light of the claim this week that a futures trader precipitated a plunge in the stockmarket in 2010 (see article).

The Volcker plan would also reconfigure the Financial Stability Oversight Council (FSOC), the new committee created by Dodd-Frank. One of its main jobs is to decide which financial firms should be designated as systemically important, and thus subject to particularly heavy regulation. Mr Volcker would allow the treasury secretary to continue to chair the council, but would also strip him of a vote, in a bid to strengthen its independence. By the same token, the bit of the Treasury that currently provides advice to the FSOC, the Office of Financial Research, would become an independent agency. The intention is to provide an alternative voice to an all-powerful Fed.

There are several gaps in the Volcker plan. The fate of many entities of dubious value, such as the regional Fed banks, remains unclear. More importantly, Mr Volcker is focused on improving the effectiveness and accountability of regulators, and thus the soundness of the firms they regulate. But many in Washington, DC are more interested in expanding the government’s power over the financial world, thereby increasing its ability to steer money to politically desirable ends. When Mr Volcker said that no one was happy, he perhaps had not considered the politicians who set the system up.