CEI Opposes Broad New Powers for Federal Reserve

D.C., March 31, 2008—Treasury
Secretary Henry Paulson today unveiled a plan for restructuring the federal
role in regulating financial institutions. The blueprint contains good
recommendations on eliminating excessive securities and insurance regulation,
but the proposed “market stability” provisions would give the Federal Reserve
Bank open-ended and unaccountable power over many types of American businesses,
say Competitive Enterprise Institute financial experts John Berlau and Eli Lehrer.

“To propose, as the blueprint does, that the
Fed can examine any business that poses a threat to the financial system, would
result in an unacceptably broad jurisdiction,” says Berlau, director of CEI’s Center for Entrepreneurship. “Many
small entrepreneurs may suddenly find themselves at the Fed’s mercy. Federal
statutes and rules have already stretched the definition of ‘financial
institution’ to include such diverse businesses as jewelry stores, car dealers,
and travel agencies.”

Berlau says, however, that the report’s recommendations on
merging the Securities and Exchange Commission with the Commodity Futures
Trading Commission deserve careful consideration. “The SEC, particularly with
the advent of the Sarbanes-Oxley accounting mandates, investigates far too much
minutiae that don’t pose a systemic risk. Getting rid of this excess and
redundancies with agencies like the CFTC would benefit entrepreneurs and

Lehrer, a CEI senior fellow who specializes in insurance analysis,
praised the blueprint’s call for optional federal charter for insurance
companies who wish to forego state regulation. “For those who support a more
open and creative insurance market, this report is a major step forward,” said Lehrer. “It’s
not perfect but, on insurance issues, it outlines a productive way forward.”

CEI will issue further statements as it studies the
blueprint in the days ahead and will warn against a rush to
overregulation. “Excessive and costly regulation of banks – from
Sarbanes-Oxley to ‘suspicious activity’ reporting requirements – is one of
the factors that led to so much securitization of loans to less regulated
entities,” Berlau says “If we shower other financial institutions with
expensive and intrusive new regulations, we can expect similar unintended


Finance Experts Available for

John Berlau

Director, Center
for Entrepreneurship


[email protected]

Eli Lehrer

Senior Fellow


[email protected]

CEI is a non-profit, non-partisan
public policy group dedicated to the principles of free enterprise and limited
government. For more information about
CEI, please visit our website at www.cei.org.