Fed calls for bank scrutiny

WASHINGTON — Two days before Congress rolls up its sleeves and begins to consider new regulation of financial markets, Federal Reserve Chairman Ben Bernanke on Tuesday called for additional powers to look more closely at investment banks, with an eye toward preventing a future collapse of the global banking system.

The Federal Reserve also will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, its most sweeping response to a housing crisis that has propelled foreclosures to record highs.

When the head of the Fed calls for greater financial regulation, echoing Treasury Secretary Henry Paulson, a former Wall Street titan, it's significant. It signals a growing shift in the nation's capital toward embracing stronger regulation of financial markets, after at least a quarter-century of a more hands-off approach.

"It is going to be a turn back towards more regulation, but it's not going to be so easy," said Barry Bosworth, a presidential adviser in the 1970s who's now a senior economics fellow at the Brookings Institution. "They've got a dilemma that some of these new financial instruments, and markets, have become so complex. If they continue to let them operate, it's not clear that the regulators will be able to keep up."

Vincent Reinhart agrees. Until recently, he was the chief economist of the Fed's interest rate-setting Open Market Committee. Reinhart, too, thinks that significantly stronger regulation is coming.

"It's quite possible that in the spring of next year, we will have the most significant reregulation in memory, and I don't think it's (in the last) 25 years. I think it's 75 years, and you've got to go back to 1933" and the Great Depression, said Reinhart, who's now an analyst at the American Enterprise Institute.

Bernanke signaled clear support for congressional and Bush administration efforts to bolster existing financial regulations when he spoke Tuesday to a Federal Deposit Insurance Corp. forum outside Washington. He supported expanded Fed powers to guard against systemwide shocks to global finance but cautioned that his agency needs Congress to grant it explicit authority, which it now lacks.

"The financial turmoil since August underscores the need to find ways to make the financial system more resilient and stable," Bernanke said.