Will Federal Reserve Regulate Personal Loans and Credit Cards?

US Federal Reserve, Washington, DC,

US Federal Reserve, Washington, DC,

Will the Federal Reserve become the new financial regulator?

President Obama is looking for ways to revamp policies concerning personal loans and credit cards. One proposal is to designate the Federal Reserve as regulator of the banking system as a whole. The Reserve would take on the responsibility of policing large firms, the demise of which would be highly detrimental to the economy.

Treasury Secretary Timothy Geithner has announced the plan to make the central bank a regulatory entity. It would give the Reserve more authority and hopefully create more consumer protection in terms of lending practices and credit card company policies. The goal is to “bring unregulated sectors of the financial markets under government oversight.”

What should the role of the Federal Reserve be?

Critics maintain that the Federal Reserve serving as regulator is a daunting and implausible task. Senator Richard Shelby of Alabama stated, “I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles.” The Federal Reserve currently is in charge of regulating banks, setting policies on money, and a wide variety of other public services. Many legal analysts and lawmakers are hoping for the creation of a new council of regulators to oversee large financial entities. The debate remains whether or not the Reserve can handle the job effectively given its myriad of current responsibilities.

What is Obama’s plan?

In addition to empowering the Federal Reserve to supervise the largest and potentially most influential financial entities, the president wants to create a body of federal regulators. They would work under the direction of the treasury secretary to gauge risk, but would not have direct authority over financial institutions. This body of regulators would act as a protective committee to regulate policies concerning personal loans, mortgage loans, credit card lenders, and mortgage brokers.

Obama’s plan has met with sharp public criticism. According to a New York Times/CBS News poll, about 60% of Americans don’t believe the president has a viable approach for dealing with the budget deficit, and 50% disapprove of his management of the auto industry crisis. Still, there remains a 56% approval rate of the president’s overall management of the recession, and Capitol Hill agrees that his plans would “prevent another round of bank bailouts and protect consumers from predatory lending practices.”

Where will the Federal Reserve fit in?

It is yet to be seen where the Federal Reserve will fit into the policing of large financial institutions. Many believe that full-on regulation is too lofty a task for the Reserve to take on. The question remains whether Obama’s idea relies too heavily on the Reserve, which, in reality, is an independent agency with no Congressional authority. Senator Dodd stated, “It’s certainly worthy of a thorough and full-throated debate and discussion as to whether or not that’s a better alternative than vesting the Fed…There’s not a lot of confidence in the Fed at this point.”

What is the bottom line?

Regardless of which entity ends up policing large financial institutions, the Federal Reserve or a newly-built body of regulators, experts agree that there needs to be an agency whose central focus is the monitoring financial entities. For the protection of the public, this committee has to regulate lender practices, financial viability of industry giants, personal loans offered to consumers, mortgage policies and procedures, and long-term economic growth.

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