A few points on the new plan:
1. The Fed is smarter than other regulators, the Fed can pay higher salaries, and the Fed has more independence.
2. Ceteris paribus, the Fed usually can do a better job than other potential regulators. If someone is going to oversee hedge funds and other non-bank financial institutions, why not the Fed?
3. An independent central bank is, all things considered, a good idea for reasons of monetary policy.
4. The Fed, as regulator of financial markets, has an incentive to keep economic growth high and this also militates in favor of the Fed as regulator. A new prudential regulatory agency for capital markets would not be responsible for the overall macroeconomy and would not necessarily have that same pro-growth incentive.
5. A regulator must, one way or another, be accountable to Congress and the President. The more that the Fed is accountable to the other branches of government on regulatory issues, the more it is accountable to them period. That would be true even if monetary policy and regulatory decisions were not converging in practice, as they have been in recent months.
6. In essence we are on the verge of "spending" some of the Fed’s monetary policy independence in return for superior regulation. That choice makes me nervous. Indeed, arguably we have already made that "expenditure."
7. The new plan, oddly enough, takes away the Fed’s power to oversee banks on a daily basis.
8. One important question is what kind of relationship would develop between the Fed and a new, unified office of prudential regulation. See #7. Even if there is consolidation of all the loose regulatory spokes (should credit unions really get a separate regulator?) into an oversight agency, we should somehow keep the Fed’s special access to bank balance sheets. I’m not sure how the Paulson plan fares on that score.
Note also that the Fed is deliberately non-transparent. Is that, when all is said and done, one reason why we are looking to it to enforce more transparency in other institutions?