Reuters: U.S. Seeks enhanced financial authority for Fed

By John Poirier and Glenn Somerville

(Reuters) The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to take actions to ensure market stability.

An executive summary of the proposals published by the New York Times, which Treasury Secretary Henry Paulson will make public on Monday when he unveils a blueprint for regulatory overhaul, says it is vital to fix "regulatory gaps and redundancies" exposed by an ongoing subprime mortgage crisis.

Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.

The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.

It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow.

NEW FED POWERS

If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.

Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.

It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.

Treasury officials refused on Friday to reveal details of the proposals but numerous trade groups had been invited to a speech by Paulson on Monday at Treasury and speculation quickly swelled that its long-awaited prescription for streamlining regulation was at hand.

Treasury said it has been working on its proposals since March last year, well before calls for an overhaul began to intensify in the wake of the subprime mortgage crisis that began to wreak havoc last summer on financial markets.

Paulson had signaled some of the direction the proposals would take earlier this week when he said that since the Fed had taken the exceptional step of permitting investment banks access to its discount window for loans -- the first time it has done so for any financial entities besides commercial banks since the 1930s -- it should have some authority over the investment banks.

ACCESS BRINGS RULES

"Certainly any regular access to the discount window should involve the same type of regulation and supervision," he said in a speech to the U.S. Chamber of Commerce.

Another proposal would provide an option for insurance companies to obtain a charter to do business under federal regulation, though it says the current state-based system would continue for any that did not get a federal charter.

Most of the financial services industry in the United States is regulated by federal authorities except insurance, which the states supervise. For years, big insurance companies, however, have been calling for an optional federal charter.

The chairman of the House Financial Services Committee, Democratic Rep. Barney Frank, last week said Congress should seriously consider giving a federal agency the power to monitor all risk in the financial system and act when necessary, regardless of its corporate form.

Frank suggested one possibility would be to empower the fed as "Financial Services Risk Regulator," an idea that Treasury's proposals appear to broadly embrace.

Many analysts and some Treasury officials have said they don't expect recommendations made during the current administration to become law but hope it will be used a springboard for the next resident of the White House.

(Reporting by John Poirier and Glenn Somerville; Editing by Louise Heavens)

WSJ: In Debt Crisis, Uncle Sam Is Piling It On

From the 3/24/2008 issue of the Wall Street Journal comes this story written by Mark Gongloff.

While everybody else is running headlong from the burning building of debt, Uncle Sam looks like he is rushing in the other direction.

As the credit crisis deepens, there's every reason to expect old-fashioned Keynesianism to become de rigueur, with the government blowing out the budget to make the downturn less painful.

It started with the recently passed $152 billion stimulus package, and it probably doesn't end there. The government is also building massive backstops for the financial system and the housing market, agreeing to hold or guarantee trillions of dollars in mortgage and other private loans through the Federal Reserve, and, less directly, through federal home loan banks, Fannie Mae and Freddie Mac.

The next steps could be more stimulus, direct bank bailouts and government purchases of mortgage securities, easily dwarfing the $125 billion or so the government spent to fix the savings and loan debacle. The alternative could be a far more devastating economic downturn now.

Is the government in any position to take on this burden? At the moment, the federal budget seems to have wiggle room. The deficit shrank last year to 1.2% of gross domestic product, the lowest since the budget was in surplus in 2001. And the Congressional Budget Office projects surpluses will reappear in 2012.

But the CBO estimates aren't very realistic. They don't take into account the stimulus package, spending on wars in Iraq and Afghanistan wars (sic) or patches for the alternative minimum tax. Nor do they account for an economic slowdown that is already having an impact on federal tax receipts. Both corporate and personal non-withheld receipts turned negative on a year-over-year basis in the fourth quarter, according to Goldman Sachs analysts, who estimate the deficit will jump to 3% of GDP this year and in 2009 - double the CBO's forecast.

Meanwhile, presidential candidates of both parties are making promises that will cost trillions of dollars more if they keep them, either in expanded health-care coverage or making the 2001 and 2003 tax cuts permanent. More ominously, all of this comes as millions of baby boomers are on the threshold of retirement, which will lead to an explosion of Medicare and Social Security spending in the years ahead.

In theory, deficits push interest rates higher as government debt competes with private debt for investors' attention. A 2003 Fed study estimated that every time the budget deficit rises by one percentage point of gross domestic product, it adds one quarter of a percentage point to what long-term rates would otherwise be.

The budget has been in deficit for most of the past two decades with little noticeable impact on borrowing costs. This is largely because foreign investors, mainly central banks, have been happy to finance the profligate spending of U.S. consumers, lawmakers and presidents by snatching up Treasury bonds, keeping the rates low.

As long as they're willing to keep buying U.S. assets, this happy symbiosis can last. At some point, they might start to worry about America's ability to pay its growing debts.

Then Uncle Sam will ahve to start deleveraging, too.

Email mark.gongloff@wsj.com