I think one last post should suffice about Senate Banking Committee Chairman Christopher Dodd's (D-CT) new financial reform proposal (.pdf) -- for now. When markup starts (and supposedly ends) next week, there may be more to say about amendments that pass and fail in committee. But for my seventh post on the topic (links to the others below), I thought it might be useful to comment on what I found most surprising about his version of financial regulation. Some of this will serve as a summary for points I've made before, but a few I have neglected to mention until now.
Consumer Financial Protection Bureau Director's Power
Despite the fact that the most talked-about aspect of Dodd's CFPB is his decision to place it in the Fed, I think it's also probably the least interesting. As far as I can see, the CFPB would be essentially independent, even if its staff would share office space with other Federal Reserve personnel.
Instead, I found the most surprising aspect of Dodd's CFPB the power he would provide to its director. The U.S. Chamber of Commerce did a good job in illuminating this criticism of Dodd's version yesterday. The House version would have the agency's power much less concentrated, with group of appointed commissioners in place to take on some of the responsibility for doing the regulating. With Dodd's version, the director would do all the hiring, decide how to spend the budget and presumably have a huge impact on the regulation.
The Council's Two-thirds Standard
Another difference between what the House and Dodd propose for systemic risk regulation is the difficulty that their respective councils would have in making decisions. In deciding to subject a firm to systemic risk regulation or breaking big ones up, the House bill would only require a simple majority of the council to vote in favor. Dodd's would require a two-thirds majority for both tasks. As I said, I think the difficulty in achieving a majority would ideally be based on how controversial a decision is being made. So for systemic risk regulation I like a simple majority, but for break-up, two-thirds is probably prudent.
Dodd's bill manages to give the Fed a great deal more power than his original proposal in November would have. Now he's conceded that the Fed should do most of the systemic risk regulation. He even hands it the CFPB, though it will be held at arm's length. Yet at the same time he appears to want to rein in the Fed a bit. Those aspects of his plan, he amusingly titles "Strengthening The Federal Reserve" in his summary.
I didn't see several of these proposals coming. For starters, it's interesting that he hopes to add "financial stability" as a specific duty the Fed must aim for. Even though the Fed has sort of implicitly tried to smooth economic cycles over the past few decades, it has never explicitly been ordered to pop or prevent bubbles.
Dodd's desire to prevent bank employees, past or present, from acting as directors of the Federal Reserve is also not an idea I had heard being loudly shouted in Washington before. While I think it's sensible insofar as these individuals could favor their own banks' interests with a role in the Federal Reserve, I also worry about losing their market expertise and experience entirely. These people are in the trenches, so you don't want them to stay away from the central bank altogether. Perhaps this proposal could be changed to simply recommend that bank employees not have any voting power, but can sit on Fed boards as non-voting members.