Friday, April 3, 2009

Fed In Congressional Crosshairs

From the WSJ:

For the past 18 months Federal Reserve officials have been fighting off storms in financial markets – now they’ve got a storm brewing in Congress that they’re going to have to direct their attention to fighting.

The Senate on Thursday passed a resolution that put it in the line of fire of lawmakers who want to shake up the Fed’s regional bank system. In a nonbinding resolution that passed 96-2, the Senate called for “an evaluation of the appropriate number and the associated costs of Federal reserve banks.”

A nonbinding resolution is a long way from becoming law. But it’s a clear signal to the Fed that it is headed for increased scrutiny on Capitol Hill. (It was also striking that Nancy Pelosi, speaker of the House, last month held Fed Chairman Ben Bernanke out as partly to blame for the troubles at American International Group Inc.)

And then there is this:

In another warning shot at the Federal Reserve about its disclosure practices, the Senate Thursday called on the central bank to reveal the names of institutions that receive its loans and what they’re doing with the money.

The Senate’s nonbinding resolution, which doesn’t have the force of law, was a sign of mounting mistrust in Washington about the course of government rescue programs and the Fed’s role in them. It passed 59-39, a strong show of support.

Lawmakers are likely to keep pushing the central bank to disclose more about the firms receiving Fed as part of its vast financial rescue efforts. Though a resolution doesn’t have the force of law, it could become attached to legislation at a later date.

Let's take these one at a time.

As the first article notes, the Federal Reserve banking system has not been revised since its inception -- we are still using the same district system established at least 70 years ago. I'm guessing there have been noticeable changes since then which are not reflected in the Fed district maps.

However, the second issue is trickier. When a bank goes to the Fed it's usually because they can't get any help from other banks in the short term loan market. That means the Fed is the lender of last resort. The bank asking for help may want to keep things quiet so they can fix their problem without causing a banking panic. At the same time, the public -- and more importantly individual account holders -- may want to know the bank is in trouble so they can pull their money out. In other words, it's a far trickier proposition.