Treasury’s Geithner Wants More Government Regulation

The Obama Administration is planning a broad, dramatic set of new regulations for the U.S. financial system, a plan that is being met with criticism from both the banking industry and many Republicans on the Hill.

In an appearance before the House Financial Services Committee Thursday, Treasury Secretary Timothy Geithner claimed that “our system failed in basic fundamental ways” and needed “not modest repairs at the margin, but new rules of the game.”

“The most simple way to frame it is: capital, capital, capital,” he added. “That’s something we have to impose through standards set in regulation.”

Some of the administration’s proposals to safeguard the financial industry from future failures have been extremely controversial since they were announced a few days ago. These include giving the government the power to takeover floundering companies before they go under to make sure their failure does not spread to other companies, and the power to control how much risk and leverage that non-bank financial corporations could shoulder.

The first proposed power has shocked many on Capitol Hill as well as on Wall Street. “Do you realize how radical your proposal is?” Republican Congressman Donald Manzullo, of Illinois, asked Geithner during the Committee meeting. “You’re talking about seizing private businesses.”

Yet Geithner contended such enormous power might be necessary when extremely large corporations go down, and he cited the AIG fiasco from the previous year as evidence of this.

“This is a prudent, carefully designed proposal to protect our financial system,” Geithner said.

The plan is still lacking in specifics, including things like what the requirements would be for government intervention with private companies, but many worry that the new guidelines would give politicians more permanent power over the private sector than is necessary.

The second proposed safeguard, of limiting financial companies’ risk and leverage will also, no doubt, be hotly contested, as many major corporations would be forced to periodically open their books to the government for monitoring and approval.

Yet the Obama administration argues that these changes are needed to fix the current economic crises and prevent similar upheavals in the future.

“We’ve seen that the costs of these weaknesses and gaps are catastrophic to the system as a whole,” Geithner said. “It just didn’t work; it did not deliver what is has to deliver. And I think we have to start by making sure we have in place effective consolidated supervision over those entities that could pose potential risks to the system.”