The head of the World Bank on Monday sounded a cautionary note about granting greater regulatory power to the US Federal Reserve and said the dollar's future will "depend heavily on US choices." "It should not be a surprise that American democracy is hesitating about authorising the Fed to supervise systemic banking as well as operating monetary policy, adding to its power," World Bank President Robert Zoellick said.
In a speech prepared for delivery at Johns Hopkins University's School of Advanced International Studies, Zoellick said the US Congress had a long tradition of viewing banks with suspicion that made it a challenge to beef up the US central bank's power after last year's financial panic. Aiming to prevent a repeat of the crisis that pushed the world financial system to the brink of collapse, President Barack Obama has proposed sweeping changes to US regulation that would make the Fed the lead systemic risk regulator.
"It will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority. My reading of recent crisis management is that the Treasury Department needed greater authority to pull together a bevy of different regulators," Zoellick said.
Zoellick, speaking ahead of the annual World Bank and International Monetary Fund meetings that open in Istanbul on Sunday, commended central banks for forceful action once the crisis hit. But he said they face "reasonable questions" for failing to prevent asset bubbles - notably in the US housing market - and for serious lapses in financial supervision.
"We have yet to see whether central banks can handle the recovery without letting inflation get out of control," he said. "Of course, the US dollar is and will remain a major currency. But the greenback's fortunes will depend heavily on US choices. Will the United States resolve its debt problems without a resort to inflation?," Zoellick asked.
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