(Updated with response from Dodd's office; see below.)
One of the president's top economic advisers expressed concerns Friday that financial regulatory reforms proposed by Sen. Chris Dodd (D-Conn.) would take too long to become operational and would in some respects be ineffective.
Austan Goolsbee, who sits on the White House's Council of Economic Advisers, said he felt some "nervousness" about Dodd's proposal to create a committee independent of the Federal Reserve to oversee risks in the financial system and police potential threats to the economy.
"The administration's view is that systemic institutions ought to be governed by the Fed," Goolsbee said. A different group could be charged with looking at problems on the horizon, "The Dodd version is 'let's combine both of those and create some new agency,'" he said. "I am a little worried that to create that new agency would take a long time and by the time you got to that we are back into this world."
Speaking at Bloomberg News's Washington Summit, Goolsbee compared Dodd's blueprint for financial regulation to the type of system seen in England, then noted that "they have a lot of problems in the U.K. as well." The chief concern, Goolsbee stressed, was to have strong coordination within a regulatory body. Splitting up functions -- as the Dodd bill proposes -- could, he predicted, lead to missed warning signs or bureaucratic mishaps.
"There has always been an issue that in a moment of crisis, where the Fed is out there trying to figure out what to do, if they are not integrally involved with the actual regulation and oversight of the institutions, you can, if you do it wrong, get into a left hand doesn't know what the right hand is doing crisis," Goolsbee said.
Dodd, who chairs the Senate Banking Committee, has put forward what is regarded as the most aggressive of the three official proposals for re-regulating the markets. The senator has called for overhauling the existing regulatory establishment -- in part by removing powers from the Fed and the Federal Deposit Insurance Corp. and creating three new agencies to oversee the financial system, protect consumers, and anticipate future crises. Dodd's proposals have, however, come under attack from industry groups, and House leaders have, as The Washington Post put it, found parts of the proposal "untenable." One of the concerns from the administration is that the Dodd plan is simply too sweeping and ambitious to make it through Congress.
Kirstin Brost, a spokesman for Dodd on the Senate Banking Committee, emailed the Huffington Post taking umbrage with various of Goolsbee's assertions.
Where Goolsbee suggested that regulatory functions would best be housed under one roof -- the Federal Reserve's -- Brost notes that, "giving the Federal Reserve too many responsibilities led to missed warning signs" in the first place.
In regards to his comparison of the regulatory framework under Dodd's plan to that in the U.K., Brost writes: "The last thing we would want would be to set up a UK style regulator. The FSA in the UK merges regulations for banks, securities, insurance, and consumer protections into one agency. Dodd's proposal does the opposite. The crisis taught us that when an agency has too many responsibilities it won't do any of them well. Dodd's bill creates a single bank regulator, a consumer financial protection agency, and a systemic risk regulator and also preserves the SEC, FDIC, CFTC, NCUA, 50 state bank regulators, and 50 state insurance commissioners."
Finally, Brost pushes back on Goolsbee's suggestion that if you remove responsibilities from the Fed, you could create a system where information is not shared between agencies and crises are missed.
"We keep the Federal Reserve integrally involved with a seat on the boards of the FDIC, the single prudential bank regulator, and the systemic risk regulator," she writes. "Dodd's proposal will ensure that the Fed has the ability to get whatever information they need from banks and other regulators in order to do their job on monetary policy and as lender of last resort.
"Dodd wants to focus and strengthen the Federal Reserve's ability to do their core functions - monetary policy, lender of last resort, and payment systems supervision."