The Fed botched banking regulation once already. So why does Obama want to give it more power?

The Federal Reserve Bank has managed through most of its history to reside in obscurity—little understood, rarely questioned, viewed as hovering above the political fray, the domain of technocrats and erudite economists. That should all change.

The Fed's power over all things economic is hard to overstate, and it now desires even more, seeking the title of "systemic risk regulator." Some of us have argued that regulators—and the Fed in particular—have had virtually all the power they needed to avert the economic traumas we have been living through: They just failed to use it. Yet the proposed formalization of the Fed's mega-regulator role requires that we lift the veil that has shielded it from scrutiny for too long.

The United States should not lightly put our fate back in the hands of the very entity whose oversight of the economy and financial sector brought us into the abyss. The Fed's lack of accountability and transparency is no longer justified by its record or sound principles or public policy. Granting the power without asking the tough questions would be following the path of least resistance—regulators don't want to answer the tough questions, and legislators would still rather defer to the Fed than grapple seriously with a tough problem.

When I recently asked for minutes and attendance records of the New York Fed board meetings, the N.Y. Fed declined, saying simply that it doesn't give out such information. That answer might have been acceptable in times of economic stability or robust growth. But these are not normal times. In the past year, the N.Y. Fed has clearly missed some of the most important economic trends and inflection points over which it had regulatory jurisdiction; has orchestrated some of our nation's most significant financial transactions behind closed doors; and has made fundamental public-policy choices involving trillions of tax dollars without being required to explain the rationale for those choices in public.

So it's reasonable to ask whether the Fed is up to the task it seeks to formally embrace and, if it is, whether its governance structure is appropriate. These questions must be both retrospective, examining with exacting care the decisions the Fed has made, and also prospective, asking how would it define its role and tasks.

Here are a few questions relating to past decisions:

Where is the legal analysis showing the Fed had no power or insufficient power to intervene to save Lehman Bros.—widely viewed as the failure that precipitated the credit crisis—as it has claimed repeatedly, yet had sufficient power to orchestrate the gift of Bear Stearns assets to JPMorgan Chase? How did it differentiate between the two?

What analysis had the Fed done of the potential impact of derivatives trading over the five years preceding the meltdown as derivatives trading grew exponentially? Was there any effort made to assess the overall risk facing the banks the Fed was supposed to oversee?

Did the Fed do any analysis of the risk that would result from AIG's potential default, and how did the Fed analyze the risk to each of AIG's counterparties?

When the Fed authorized the first $80 billion payment to AIG, almost all of which flowed directly through to counterparties, why did the Fed not arrange for taxpayers to get equity in the counterparties, rather than the essentially worthless AIG equity? What communications did the Fed have with the counterparties over this period?