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Dodd's Proposal Stirs Debate

Stocks in this article: BAC AIG C

Given the rhetoric of Fed Chairman Ben Bernanke's recent congressional testimony, and the hue and cry from conservatives like Sen. Jim DeMint (R., S.C.) and Rep. Ron Paul (R., Texas) who have proposed launching an examination of the Fed's financial activities, advocates of the central bank's purported political independence will have a tough time. After all, Fed chairpersons are elected by the president, and if former Fed Chairman Alan Greenspan is any example, that independence and perceived infallibility can be dangerous.

Paul calls the notion of political independence a "facade," noting that chairmen must set up alliances with presidents in order to re-appointed: "There is a lot political shenanigans going on with the Fed already."

Petrasic agrees that the Fed is "politically sensitive" already, but says its thin layer of independent sheen was enough to prevent a major financial catastrophe during the crisis.

"Imagine a year ago that the Fed chairman and Treasury secretary had to get a sign off from the House and Senate to implement all these crisis programs?" Petrasic asks rhetorically. "It never would have happened. Things would have been far worse."

Before Dodd's bill can go anywhere, he will have to negotiate with House Financial Services Committee Chairman Barney Frank (D., Mass.) and the Obama administration, whose competing proposals would expand the Fed's power, rather than constrict it. The House and executive branch appear to be focused on what's politically feasible, to make some meaningful reforms as quickly as possible. Dodd, on the other hand, is working from the other end of the spectrum - what the senator considers the ideal reform - and hoping that the two will meet somewhere in the middle.

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