The Obama administration proposes to vastly expand federal oversight of the U.S. financial system. There is broad agreement that a new, more powerful regulatory framework is needed. For the moment — at least, until the economy turns around — the laissez-faire, deregulatory types are in hiding.
The plan would establish federal regulation of the larger hedge funds — meaning their books would be open; derivatives trading — the downfall of several big investment houses; and large insurance companies — to avoid a repeat of the AIG flameout.
The administration also proposes "a systemic risk regulator," a federal agency charged with monitoring the overall financial system and having the power to impose capital requirements on the largest players and intervene to block high-risk activities.
Administration officials had earlier asked Congress for the power — similar to the power it now has to seize banks — to seize faltering financial institutions whose failure would threaten the broader system.
The administration’s lead advocates on the proposal are Federal Reserve Chairman Ben Bernanke, who in a departure from the traditional role of the nation’s central banker finds himself actively engaged in legislation, and Treasury Secretary Timothy Geithner, who, after a stormy start, seems to have found his sea legs. Certainly the calls for his resignation have subsided.
So far, the plan is lacking a few vital details — specifically, who is going to do this and how. The bill the administration sent to Congress is only 61 pages, a bare-bones outline in matters this complex. Indeed, one member of the Senate Banking Committee praised it as "a good first outline."
A great deal of this measure has been left up to Congress. Should the power be concentrated in a single, powerful new agency? Or should existing regulatory agencies be strengthened and made more collaborative in what Securities and Exchange Commission Chairman Mary Schapiro called "a college of regulators"? The Obama administration seems to favor turning the bulk of the task over to the Fed, but it legitimately may be asked if that will detract from the Fed’s principal task of safeguarding the nation’s monetary system.
Although it may not be politically popular, the architecture of this new regulatory system should be designed with considerable input from the financial institutions it will be overseeing. Having gotten us into this mess, they may have some worthwhile thoughts on getting us out.