Finance news. My opinion.

Paul Volcker, a former Federal Reserve chairman and now a outside economic adviser to President Barack Obama, criticized the administration’s plan to give the Fed authority to supervise “systemically important” financial firms.

“I don’t know what systemically important institutions are,” Volcker said. “But I’m sure that if you picked them out, people will assume they’re going to be saved, that they’re too big to fail.”

Volcker’s remarks appeared in the form of a “conversation” with Gary Stern, who retired last month as president of the Fed Bank of Minneapolis, and published in “The Region,” the bank’s quarterly bulletin. Volcker, 81, is chairman of the Economic Recovery Advisory Board, a body created by Obama in February to recommend responses to the crisis.

Obama’s plan to give the Fed powers to monitor risks to the financial system is aimed at avoiding a repeat of the financial meltdown that led to $1.6 trillion of bank losses and writedowns and triggered a global recession. The Obama plan would label banks including Bank of America Corp. and Citigroup Inc. as “systemically important” and subject them to capital and liquidity requirements and stricter oversight.

Jen Psaki, a White House spokeswoman, declined to comment on Volcker’s remarks.

Council of Regulators

The plan has drawn criticism from lawmakers including Senate Banking Committee Chairman Christopher Dodd, who has said the central bank failed to use its existing supervisory powers to curb some of the lending practices that contributed to the crisis. Congressional leaders are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators.

The administration also wants the power to seize financial institutions if they run into trouble. And Obama’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission.

Volcker said the central bank should instead oversee bank regulation carried out by an independent agency. The chairman of that agency could also be a vice chairman of the Fed, both to keep the central bank in the loop and increase accountability.

Volcker, who was Fed chairman from 1979 to 1987, said the central bank itself needs some reorganization “to more clearly focus responsibility for the regulatory side of the house.”

“There’s no doubt in my mind that the attention the Federal Reserve has paid to regulation has gone up and down over the years, depending upon both the intellectual and market environment, and the personalities involved.”

Hedge Funds

He also would limit regulation of non-bank financial institutions such as hedge funds.

“If they get big enough, then they’re going to need capital requirements and leverage requirements,” Volcker said. “But I don’t think that’s going to be many firms. I’d like to create the impression, to the extent you can, that there’s no automatic bailout of those institutions.”

Volcker said he has a different “regulatory philosophy” than the Treasury Department. Banks, he said, provide basic financial services, including payments and credit, and should have some government protection and support.

Hedge funds, private equity, and proprietary trading are different businesses, Volcker said, and should be kept separate from banking. He cited Goldman Sachs Group Inc., which became a bank holding company last September, took government aid, and yet has a large proprietary trading operation that is responsible for much of its profit.

Taxpayer Support

“There’s nothing wrong with making money,” Volcker said. “But I don’t want them to make money by taking risks with the support of the taxpayer.”

An industrial company such as General Electric Co. presents another problem, he said.

“It’s certainly not a bank in any traditional sense, but it’s a big financial business,” Volcker said. “Do you want to get into the business of directly or indirectly supporting General Electric?”

Volcker, who pushed the federal funds rate as high as 20 percent to throttle inflation in 1980, also took issue with the current Fed’s management of monetary policy. Its statements are confusing, he said: on the one hand they worry about inflation falling, on the other, the commit to price stability.

“I say, ‘Look, make up your mind,’” Volcker said.

He disagrees with Fed Chairman Ben S. Bernanke’s call for an inflation target. “I have not been in favor of inflation targeting,” Volcker told Stern. “I just don’t like it symbolically.”

In congressional testimony in February, before the administration released its financial-overhaul plan, Volcker said giving the Fed additional regulatory authority would distract members from their main job of making monetary policy.

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