In Fed We Trust

By JEANNINE AVERSA
|  Monday, Mar 23, 2009  |  Updated 6:28 PM PDT
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In Fed We Trust

AP

The Federal Reserve's undemocratically-elected chairman could soon gain a lot more power.

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WASHINGTON — The Federal Reserve should play an expanded, "central role" in preventing future financial crises like the one now gripping the country, the U.S. central bank and the Treasury Department said Monday.

The joint statement from the agencies now leading the United States' efforts to end the crisis and lift the country out of recession came as the Obama administration and Congress seek to overhaul the nation's financial structure to avoid future meltdowns.

The Fed — already the lender of last resort to troubled financial companies — could end up with a much larger role once a regulatory revamp is finalized.

Congress created the Fed in 1913 in large part in response to the periodic panics and crises that plagued the U.S. financial system in the 19th and 20th centuries.

"For these reasons, it is natural and desirable that the Federal Reserve should play a central role, in cooperation with the Department of the Treasury and other agencies, in preventing and managing financial crises," according to the joint statement.

Michael Feroli, economist at JPMorgan Economics, said he viewed the statement as giving "the Fed a leg up in the contest to become the financial 'super regulator.' "

The Fed will work closely with Treasury and other agencies to improve the functioning of credit markets and help prevent the failure of huge financial institutions that could cause major damage to the economy, the statement said.

Both Treasury and the Fed once again called on Congress to set up a system that would allow a failure of a single major financial institution to be handled in such a way to minimize fallout to the national economy — similar to how the Federal Deposit Insurance Corp. deals with bank failures.

Looking ahead, the Treasury said it will seek to "liquidate" or "remove" from the Federal Reserve's balance sheet billions of dollars worth of risky assets it now holds because of last year's bailout of Bear Stearns and American International Group. It didn't provide details on the timing of such a move, other than to say it would be in the "longer term."
 

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