New Fed powers not matched with accountability

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - President Barack Obama's proposal for a regulatory overhaul of the financial industry vastly expands the reach of the Federal Reserve, yet fails to make policy-makers more accountable for their actions.

Critics argue that the new legislation fundamentally misses the problems that led to the financial crisis. It was a lack of enforcement by supervisors, they say, not insufficient rules, that fostered a cowboy culture of rampant risk-taking on Wall Street.

"Obama is letting the Fed and everyone else off the hook by saying that the problem was with the regulations and not the regulators," said Dean Baker, co-director of the Center for Economic Policy Research in Washington.

"If regulators know that even if they totally fail on the job, they will face no career consequences, then at some future point, when there is a choice between confronting the financial industry or just going along, the regulators will just go along," said Baker.

Former Fed Chairman Alan Greenspan recently admitted that he overestimated the ability of markets to police themselves. But the central bank's current leader, Ben Bernanke, has avoided much of the blame even though he was a Fed governor at the height of the housing boom.

Instead, he has won widespread praise from investors for his handling of the crisis, at least once it began.

"He's done a good job," said Michael Feroli, economist at JP Morgan. "He has played a bad hand well."

What has critics wary of an expanded Fed role is that top central bankers, including Bernanke, had dismissed the possibility that U.S. home prices could fall on a national basis. In reality, property values have plummeted more than 30 percent from their 2006 peak, and even more in hard-hit states like Florida, California and Nevada.