Fed and other regulators need policing: economist

(Reuters) – Global financial regulators are likely to impede growth rather than foster it unless they are better policed, an economist warned policymakers on Saturday.

While regulatory reform since the 2007-09 financial crisis has given added clout to government regulators, the concentration of power is likely to do more harm than good unless the regulators themselves are subject to proper oversight, Brown University economist Ross Levine said in a paper presented at the Kansas City Federal Reserve Bank’s annual meeting here.

“As more responsibilities are heaped on official regulatory agencies, it is unclear whether they have either the capabilities or the incentives to properly shape the incentives of financial systems,” he said in the paper.

A case in point is the Fed itself, which won new authority over large financial institutions in the Wall Street reform legislation passed last year.

Central bank regulators do not lack in integrity, he said, but nevertheless relying on the “moral compass” of regulators does not guarantee they will do the right thing.

“People flow between the Fed and the financial services industry, raising concerns that this ‘revolving door’ threatens the Fed’s independence and its ability to represent the broad interests of the public,” Levine said in the paper “And, the daily interactions between regulator and regulated can influence the perspectives of regulators, such that regulators take a narrow, skewed view of regulatory policies.”

The Fed has drawn sharp criticism from politicians at home and abroad who say the central bank’s super-easy monetary policy is driving down the dollar and pushing up the price of global commodities.

Levine’s critique of the Fed is different because it is focused on the bank’s regulatory role. It is notable because it paints the world’s most influential central bank and other U.S. regulators with the same brush as government financial watchdogs in countries around the world.

Oversight of regulators is critically important for promoting economic prosperity, Levine said, because without effective regulators, the financial system will not operate correctly and will drag on growth.

“This lesson is as applicable today for the United States as it is for countries with less well-developed institutions,” he wrote.

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