Speed Read: Tim Geithner and Larry Summers Preview the Summer's Hottest Regulatory Initiative!
My colleagues over on the editorial page had a nice coup today as Timothy Geithner and Larry Summers published a co-bylined op-ed previewing their coming financial regulation proposal. This is the sort of thing worth reading in full, but the quick version is that the administration is proceeding from five regulatory principles:
First, they say that the existing regulatory system was focused on the dangers to individual firms, while the new regulatory system will have to focus on the dangers to the system as a whole. The nightmare scenario, in other words, is not Lehman collapsing, but Lehman collapsing and bring the rest of Wall Street down with it. The administration plans to raise "capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms." Oversight of large firms will fall to the Federal Reserve, and oversight of the risk posed to the whole system will go to a new regulatory council.
Second, the financial system has shifted away from traditional activities, like tending to my savings account, and towards newer products, like securitized loans. The administration plans to ... well ... it's not really clear. Derivatives contracts will be subject to regulation, but what kind of regulation, and by whom? We'll know more tomorrow, presumably.
Third, the administration thinks that consumer protections have not kept pace with financial innovation. The recent history of subprime mortgages, credit cards, annuities and much else suggest that financial companies have figured out how to overwhelm individuals. "The administration will offer a stronger framework for consumer and investor protection across the board." When I find out what that means, I'll let you know. (Worrying, Simon Johnson thinks it means that they're backing away from the Financial Products Safety Commission that Elizabeth Warren previously proposed. That would be a shame.)
Fourth, the government needs the legal authority and internal capacity to "resolve" -- that is to say, nationalize or otherwise take control of -- failing firms. That would end the era in which "the government is ... forced to choose between bailouts and financial collapse." Seems wise.
Fifth, the administration will "lead the effort to improve regulation and supervision around the world." If they say so, I guess.
So where are we? Sadly, it's still a devil-in-the-details sort of situation. I think most observers would agree that these are the correct regulatory principles. The question is how seriously the government takes them. Do we get an actual agency meant to protect consumers from financial chicanery, or just a couple of limp new rules? Are the capital requirements for large firms suitably stringent? And how aggressively do they increase as the size of a firm rises? How exactly do we plan to "reduce investors' and regulators' reliance on credit-rating agencies?"
In theory, we'll find all this out tomorrow, when Geithner gives his big speech. But this at least sets up a situation in which everyone is arguing over how to achieve the same goals. The question is less what we're trying to do then how we're planning to go about doing it.
Photo credit: AP Photo/Susan Walsh)
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