“Independent” is the first word that comes to mind when I think about the Federal Reserve. Overseeing the supply of money and credit, the Fed is supposed to be an independent Federal agency.

I wonder how the following basics of the Dodd committee’s financial reform proposals will affect the Fed’s efficacy and structure.

1. A financial consumer watchdog agency would become a unit of the Fed. Having some independence, its head would be appointed by the president and confirmed by the Senate. (Organizationally, how would a new independent agency function within the Fed?)

2. The Fed would regulate the larger banks.  The FDIC and the OCC (Office of the Comptroller of the Currency) would regulate the smaller ones. (As a result, certain regional Fed banks could lose authority over most of the banks they now regulate.)

3. The Fed (with the FDIC and the Treasury) would be involved in a liquidation process for large banks.

4.  A new council to assess systemic risk would place high-risk non-bank firms under the Fed’s oversight.

5.  The Fed would implement the policy of an inter-agency financial council chaired by the Treasury. (Is independent, non-partisan action feasible here.) 

An interesting note: Dr. Bernanke hopes that the concept of a living will, written by each large financial institution, would be considered.

The Economic Lesson

Rather similar to the human circulatory system, healthy banks are a fundamental necessity because they pump the money and credit around our economy that we need to produce goods and services.