Treasury Secretary Paulson urges more power for Federal Reserve

In a 218-page blueprint unveiled today, Paulson calls for a massive overhaul that would eliminate some federal agencies. He emphasizes that the market must be stabilized before any big changes are made.

By Johanna Neuman, Los Angeles Times Staff Writer
11:54 AM PDT, March 31, 2008

WASHINGTON -- Treasury Secretary Henry Paulson today unveiled a 218-page blueprint for regulatory reform that would represent the largest federal overhaul since the Great Depression.

The blueprint, widely previewed before the secretary's remarks, would give the Federal Reserve more authority to oversee the markets and would create one superagency to oversee both investor protection and market stability, assuming many of the tasks of current agencies, such as the Securities and Exchange Commission and the Office of Thrift Supervision.

Conceding that many of the changes would have to await debate in the next Congress and the next administration, Paulson said that nothing in the long-range planning would prompt the Bush White House to veer from its focus on the current economic downturn.

"Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved," he said. "With a few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past."

Paulson acknowledged that the current system is a hodgepodge of overlapping federal and state regulations that "fosters duplicative requirements and can allow important regulatory matters to fall through the cracks." But he resisted arguments from some critics that the maze of federal regulatory agencies had contributed to the current downturn.

"I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil," he said. "I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years."

Instead, he said, "we should and can have a structure that is designed for the world we live in," more responsive to market turmoil and more agile at protecting investors, consumers and markets. "Investor protection and market stability are critical elements of competitiveness," he said. "Far from being at odds with one another, they are mutually reinforcing."

Paulson said the Treasury Department blueprint envisioned "a regulatory model based on objectives, to more closely link the regulatory structure to the reasons why we regulate." The proposed system sees three core regulatory functions -- for market stability, for financial institution soundness and for consumer and investor protection -- dictating the logic of federal bureaucracies.

Specifically, the plan recommends that the Federal Reserve gain more authority to regulate market stability across the entire financial sector, not just its current role of supervising bank holdings. "To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system," he said. "The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

The second regulatory function, financial institution soundness, would assume the role of the Office of the Comptroller of the Currency. The third, to regulate business conduct affecting consumers and investors, would assume some of the responsibilities of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

"Having one agency responsible for these critically important issues for all financial products should bring greater consistency to regulation where overlapping requirements currently exist," he said. "Mortgages are an example of a consumer financial product that has suffered from uneven and inadequate treatment in our current . . . regime."

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, called Paulson's plan a "constructive step forward" but said the Federal Reserve needs even more authority.

And Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, agreed on the need to overhaul the current structure but said that regulation had little to do with the current economic turmoil.

"What we need to do immediately is deal with the foreclosure crisis," Dodd said Monday on CBS' "The Early Show." What caused the current crisis, he said, was "a failure of leadership."

Sen. Charles Schumer (D-N.Y.), calling the blueprint "a good foundation for updating the regulation of U.S. financial markets," said that Paulson was right to attempt to reform a regulatory system to compete in a global economy. "If anything, the Treasury plan does not consolidate redundant agencies enough and a single regulator may be a better approach," he said.

He also questioned Paulson's statement that the regulatory framework is not to fault for the current economic unrest.

"The unregulated corners of our economy did much to contribute to the meltdown in our housing market and the accompanying spillover to our financial markets," he said in a statement. "The havoc wrought by independent mortgage brokers, who fueled the housing bubble, and credit ratings agencies, who rubber-stamped securities with no questions asked, certainly fueled the economic crisis we have now."

In California, Assemblyman Ted Lieu (D-Torrance), who chairs the Banking and Finance Committee, warned that what he called the administration's "colossal expansion of federal powers for the Federal Reserve" must not "come at the expense of states, many of whom have led the way in strong regulatory financial reforms." Noting that states such as California and North Carolina have enacted or are considering strong consumer protections, he said the Treasury Department's proposals "will cut us off at the knees."