Does Wall Street Need Big Brother Bernanke?

Even though he's revolutionized the way the Fed responds to crises, Ben Bernanke is a fairly humble guy. He's really not into the whole "Helicopter Ben" nickname or the dubious fame that comes with being the man who threw open the Fed's lending window to the tune of about $1 trillion. People tend to forget it now, but Bernanke was once a conservative economist, like Alan Greenspan, and a devotee of Milton Friedman. And once the crisis passes, Bernanke has indicated he would like to see the Fed pretty much shrink back to its old role of watching the punch bowl. He believes the new powers the Fed has acquired should be mostly relinquished, just as the U.S. government intends to give up its shares in the nation's banks after five years or so.

But judging from the buzz around the beltway about a new regulatory order in Washington—Treasury Secretary Tim Geithner will announce proposals in the next week or so—gentle Ben won't ever be going back into his Fed cave. Taking inspiration from a proposal unveiled more than a year ago by his predecessor, Hank Paulson, Geithner and other Obama officials are considering ways of turning the Fed into a super-regulator, possibly even subsuming the Securities and Exchange Commission and the Commodity Futures Trading Commission. Geithner suggested as much at a NEWSWEEK luncheon May 18, saying he was intent on "consolidating" the "enormously complicated, segmented structure" by which a plethora of small and often weak agencies have been outmaneuvered by the market. (Story continued below...)

The Fed is also the favored choice of Rep. Barney Frank, chair of the House Financial Services Committee, for the "systemic risk regulator" he is intent on creating, with legislation possibly to come over the summer. Frank's spokesman, Steve Adamske, told me Thursday that Frank believes the Fed is the best place to "house" such a new regulator, who will have "resolution authority" to seize and resolve the problems of large financial firms. "The Fed, because of its macroeconomic role, has the best viewpoint into these issues," Adamske said, while adding that Frank is still "open to suggestions on that."

It makes some sense. If there is any solution to the too-big-to-fail problem, short of a new Glass-Steagall law, perhaps it is to empower a government agency that's too big to be screwed around with. Only the Fed fits that description. The subprime phenomenon cut across so many sectors of finance that no one agency could keep up with it. Only the Fed "can regulate everybody," Tom Miller, the Iowa attorney general who successfully sued Ameriquest over irresponsible lending practices nationwide, told me last year. Congress recognized this in 1994 when it passed the Home Ownership and Equity Protection Act, giving the Fed the authority to oversee mortgage loans. Unfortunately then-chairman Alan Greenspan, a libertarian who by his own admission believed that markets could mostly self-correct, avoided writing any rules. It wasn't until the summer of last year—long after the securitization horse had galloped out of the barn door—that Bernanke instituted "Regulation Z," which created common-sense rules such as forbidding loans without sufficient documentation.

The SEC is the only other agency with the potential oomph to rein in the Street. If Congress merged the SEC with the Commodity Futures Trading Commission, that might help. According to Frank Partnoy, a law professor and former derivatives trader who wrote two prescient books on the crisis, two things are needed to prevent a disaster of these dimensions from happening again: 1) much greater disclosure of derivatives and other financial information so that firms know what they're buying and investors know what their firms have on their books; and 2) better anti-fraud enforcement so that firms can be sued and prosecuted if they don't own up to what they're doing. Sounds like only the combined powers of the Fed and the SEC/CFTC may be up to this task, but with the Fed in nominal control.

The move would present new risks. Making Ben Bernanke—or his successor—the sheriff of Wall Street could add too many distractions and make the new chief fiscal regulator less effective. Still, Ben Bernanke's Fed has already, to some degree, helped to save the global economy (though Bernanke's critics say it is at the cost of a terrible inflation to come). Its next task may be to save the future.