WASHINGTON (CN) – A day after President Barack Obama announced financial regulatory reforms, Treasury Secretary Timothy Geithner defended what many consider the greatest set of financial reforms since the Great Depression. Testifying before the Senate Banking Committee, Geithner said the measures will “lay the foundation for a safer, more stable financial system.”
“We cannot afford inaction,” he told the committee Thursday.
“We cannot afford a situation where we leave in place vulnerabilities that will sow the seeds for future crises.”
He described the weaknesses that led to the crisis, and explained how the reforms will better protect the market. “While many of the firms and markets at the center of the crisis were under some form of federal regulation,” he said, “that supervision didn’t prevent the emergence of large concentrations of risk.”
The reforms announced by Obama would establish the Federal Reserve as a regulator of the overall U.S. financial market and unify oversight that is now spread among various agencies into a single council that includes the heads of all the regulatory agencies and advises the Federal Reserve. In addition, the reforms would bring hedge funds under the new regulatory umbrella.
Geithner said the old regulatory system was a “patchwork of supervisory responsibility” where new financial instruments did not fall under the government supervision and loopholes allowed some companies to “shop for the weakest regulator,” added Geithner.
They new regulations will “lay the foundation for a safer, more stable financial system.”
In a phone interview, Elliot Schwartz, from the non-partisan think-tank, Committee for Economic Development, said called the reforms “very big” and said they will moderate the market to make it “a little more boring.”
The proposed regulations would create a new Consumer Financial Protection Agency, which Geithner said “will serve as the primary federal agency looking out for the interests of consumers of credit, savings, payment and other financial products.”
Although some still question how this agency will work, and how much power it will have.
Also the rules will designate the Federal Reserve as the major systematic regulator, with the power to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
Third, the regulations will establish a new Financial Services Oversight Counsel that includes the head of all regulatory agencies, and will facilitate information sharing and advise the Federal Reserve
And to protect the market from major company failures, Geithner said, “We require all firms to keep more capital and liquid assets on hand as a greater cushion against losses. And the bigger, most interconnected firms will be required to keep even bigger cushions.”
“No one should assume that the government will step in to bail them out if their firm fails,” he added. “That’s our basic objective. We want to make it safe for failure.”
Schwartz from the Committee for Economic Development agreed that regulations would lead to a safer system, but questioned the cost. The same riskiness and easy lending that led to the crisis, he explained, was also responsible for the preceding boom, where people could buy houses and could get loans.
The market will be “less growth oriented and less risk oriented,” he said.
When asked whether the new regulations will spark controversy, Schwartz replied that the strongest opposition will likely be to the Consumer Financial Protection Agency.
People don’t know what to expect from it, he said. There is “confusion about what it’s going to do, whether it’s needed, and what authorities it will have.”
The new authority of the Federal Reserve will be the next most controversial reform, Schwartz said. “It’s likely to be a lightning rod,” he said, because it will be attacked from the political right and the political left.
People from the political right will question whether the Fed has too much power, and people from the political left will doubt whether the Fed would be an adequate regulator, he said.
All in all, Schwartz said the new regulations are probably the biggest reforms since the Great Depression.