In today’s Washington Post, Treasury Secy. Timothy Geithner and Director of National Economic CouncilLarry Summers wrote about the upcoming plan of the Obama administration to reform the financial system. In it, they outlined some of the things that will be contained in the plan including regulation focusing not on individual players but on the overall systems, on securitized products such as asset-backed securities, on consumer protection, on the role of the Fed, and on US’ role in the global financial reform that is sought.
Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.
That is why, this week — at the president’s direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts — the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.
Read the rest HERE.
BaselineScenario added its comments on the piece written by the two officials. In the absence of discussion about the causes of the financial crisis, author Simon Johnson derived some causes from the underlying implications of what Geithner and Summers suggested needed to be done. With the others, he simply commented following the format “Their view-Reality”. For instance, in relation to the large institutions and the systemic risk they can provide, he writes:
Their view: “A few large institutions can put the entire system at risk,” so we need a system regulator. Reality: you need to control the behavior of large institutions, more than a few of which got us into this mess. If you can’t come up with a proposal to prevent them from taking system-damaging risk (and there is nothing in today’s article about this), then break them up. The article mentions penalties for being large – higher capital and liquidity requirements for larger banks; we’ll see the details in/after Geithner’s speech tomorrow, but I am not holding my breath for anything meaningful.
See the entire post HERE.