Treasury Secretary Timothy “Turbo Tax” Geithner, testifying about the current financial crisis before the House Financial Services Committee …
“These failures have caused a great loss of confidence in the basic fabric of our financial system, a system that over time has been a tremendous asset for the American economy.”
“To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.”
“I want to begin that process today by focusing on proposals that are essential to creating a more stable system, with stronger tools to prevent and manage future crises. In this context, my objective is to concentrate on the substance of the reform agenda, rather than the complex and sensitive questions of who should be responsible for what.”
Of course as in past testimony, Geithner was a little vague on the details …
“Over the next few weeks we will outline proposals in the areas of consumer and investor protection and for reform of regulatory oversight arrangements.”
The “Plan” …
The key elements of our plan to address systemic risk are:
First, we need to establish a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities.
Second, we need to establish and enforce substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.
Third, we should require that leveraged private investment funds with assets under management over a certain threshold register with the SEC to provide greater capacity for protecting investors and market integrity.
Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the OTC derivatives market, moving the standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.
Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.
And sixth, we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.
Which regulatory agency or institution will become “THE ONE” …
Most people believe that the Federal Reserve will be chosen as the single “systemic regulator” with unprecedented powers.
Proposing the Federal Reserve as a regulator of “systemic risk” with wide-ranging powers is clearly a major mistake …
The Federal Reserve is a PRIVATE INSTITUTION owned by its member banks. It has a congressional charter to act on behalf of the United States as a central bank, but otherwise is not responsible to the people of the United States.
There is no way for the citizens of the United States to address their grievances against Federal Reserve policies by direct action against the Governors of the Federal Reserve.
Is the Federal Reserve responsible for the current financial crisis?
There are those who believe that the Federal Reserve is at the root of all of our problems. It is through their manipulation of the United States monetary policy that has led us to asset bubbles, inflation and recessions/depressions. Many people put this current financial crisis squarely at the feet of former Federal Reserve Chairman Alan Greenspan who kept interest rates artificially low in response to the bursting of the dot com bubble. This allowed easy access to money – which produced a moral hazard where money could be invested in ventures without the careful due diligence that would have been required with harder to obtain funding. In addition, it was the flight of the global capital pool from uninteresting, but perfectly safe, low interest Treasuries into higher yield mortgage-related securities. That we suffered a regulatory failure and greed-fest which left the economy vulnerable to the malfeasance of the financial industry was due, in part, to the fact that the Federal Reserve did not prevent predatory lending under their HOEPA (Home Owner Equity Protection Act) authority.
The Fed refuses to reveal which institutions are getting assistance …
In any event, ceding unprecedented power to the Federal Reserve is a bad idea; if for now other reason is that the Fed has steadfastly refused to transparently indicate who was receiving Fed loans which may have led to the public’s questioning of the soundness of the institutions.
The Fed claimed that they were refusing to reveal the details to prevent a mass collapse of financial institutions due to a loss of public confidence which may result in bank runs like what happened at California’s IndyMac Bank. However, the flip side of the issue is that the Fed clearly knows which institutions were potentially and were betraying both the investors and the American public by letting people place their money at further risk.
Many people have argued that the opaque operations of the Federal Reserve and the Treasury Department is the causal factor preventing investors from reentering the marketplace and thus prolonging the crisis.
The fundamental question: is it better to know the depth and breadth of the crisis, and which institutions are bound to fail, or is it better to attempt a salvage and recovery operation in secret, has yet to be asked and adequately answered by the President, Congress, the media or the American public.
Clearly, the choice of the Federal Reserve does raise serious constitutional issues not only about the Federal Reserve’s very existence as a PRIVATE institution handling PUBLIC money, but about the lack of public responsibility for its secret actions.
Considering that the Federal Reserve has seemingly co-opted the Treasury Department under former Secretary Henry Paulson (formerly head of Wall Street’s Goldman Sachs) and now under Secretary Timothy Geithner who served as the head of the Federal Reserve Bank of New York, the latest question facing Congress is: do we nationalize the Federal Reserve or nationalize the financial institutions?
More as this story develops …
-- steve
Reference Links:
Addressing the Need for Comprehensive Regulatory Reform|Timothy Geithner Testimony
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