More power to the Fed?

The US financial system could be in for its biggest shake-up since the Great Depression, after comments made by two of the most powerful figures in the United States economy.  ┬á Federal Reserve chairman Ben Bernanke and US Treasury Secretary Henry Paulson addressed a Congressional panel on "Systematic Risk and Financial Markets" Thursday to argue a case for a new system of regulation.┬á┬á The idea that markets are best left alone has been the financial creed behind the US economy for decades, but the near collapse of investment bank Bear Stearns and the continuing credit crunch have caused some to question the gospel of self-policing markets.┬á┬á Secretary Paulson told the panel that the Bear Stearns rescue and the market turmoil it unleashed showed the "outdated nature" of the financial regulatory system. "This has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline," he said. ┬á┬á Fed chief Bernanke told Congress he supported the push for change. "The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning. It is not too soon, however, to think about steps that might be taken to reduce the incidence and severity of future crises." ┬á┬á He went on to suggest that Congress may need to enact new laws to increase the Federal Reserve's powers. ┬á┬á While the Fed has traditionally regulated commercial banks, investment banks have been under the oversight of the Securities and Exchange Commission, more lightly regulated because they follow a set of voluntary codes. Hedge funds have barely been regulated at all. ┬á┬á The financial world changed when the Fed stepped in to bail-out investment bank Bear Stearns in March, with Bernanke brokering a deal for a takeover by J. P. Morgan Chase to avoid a bankruptcy that might have destabilized the entire financial system.┬á┬á Bernanke also pumped more cash into the system by offering low-cost overnight loans, usually reserved for commercial banks, to investment banks as well. It was said to be a temporary measure at the time, but could well continue into next year.  ┬á┬á┬á┬á*┬á┬á┬á┬á┬á┬á┬á┬á┬á *┬á┬á┬á┬á┬á┬á┬á┬á┬á *