White House taking a flexible approach to financial reform

September 24, 2009

It was a revealing performance that Treasury Secretary Timothy Geithner gave on Wednesday before the House Financial Services Committee. and an important one. While Geithner frequently journeys to Capitol Hill, his latest appearance comes as the administration begins a new renews a push for passage of sweeping financial regulatory reform.

Maybe “push” is the wrong word. “Scramble” might be better since Geithner stressed that time is of the essence. “We can’t let momentum for reform fade as memory of the crisis recedes,” he said. Indeed, Tthe same dynamic is at play with financial reform as it is with healthcare reform: Get a reasonable bill passed this year or, ideally, before the November gubernatorial elections in New Jersey or Virginia, where Republicans are leading.

While Geithner said the uber-practical administration favors what will work, the reality might be closer to what will pass. Take the White House proposals for various consumer reforms, including the establishment of a Consumer Financial Protection Agency. Chairman Barney Frank wants to tweak the White House proposal, eliminating a provision that would force financial companies to offer “plain vanilla” versions of financial products. Frank would also exempt a range of businesses from CFPA oversight such as accountants and lawyers.

Geithner’s response: “There’s nothing in there, at first glance, that troubles me significantly in terms of its practical value.” This is good news. Rather than having a new agency attempt to determine what plain-vanilla mortgages and credit cards are and then mandate them, better to merely improve disclosure of fees and requirements for consumers.

Here is hoping that Geithner and President Barack Obama show a similar flexibility on the issue of a super-regulator and systemic risk. The White House continues to push for an expanded Federal Reserve regulatory role despite the potential risks to its independence. The idea of a SuperFed is also likely to meet stiff congressional opposition given the Fed’s role in creating the financial bubble through errors in monetary policy and lapses in regulatory judgment. Creation of a SuperFed might also have to accompany passage of a bill to audit the central bank, another threat to its independence.

Christopher Dodd, Frank’s opposite in the U.S. Senate, favors a single regulator to oversee banks. Ideally, the Fed would then be free to focus on its core mission of conducting monetary policy, while, as an American Enterprise Institute analysis put it, a separate super-regulator could enjoy supervisory economies of scale and achieve consistency. This easily passes the Geithner “what will work” standard.

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