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By John Taylor
Published: August 9 2009 19:34 | Last updated: August 9 2009 19:34
The Obama administration's financial reform proposals would grant the Federal Reserve significant new powers. These powers "“ which fall under the rubric "systemic risk authority" "“ will have a negative impact on the conduct of monetary policy. The unintended consequence would be to increase not reduce systemic risk.
What are these new powers? The Fed would be given authority to determine whether any "individual financial firm poses a threat to financial stability". All such Fed-designated firms would then be placed in a special group called "Tier I Financial Holding Companies". The Fed would then have the power to supervise all companies in this group. They would also become subject to a new "resolution regime" through which the government could, at a moment's notice, take one over or order its sale. The Fed would also have the power to collect "periodic and other reports" from all US financial groups that meet certain minimum (as yet unspecified) size standards. And the power of the Fed to intervene in any private firm or market under the "unusual and exigent circumstances" clause of the Federal Reserve Act would not be circumscribed in any specific way, effectively ratifying the type of actions that some have argued test the limits or even go beyond existing law.
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