Geithner and Summers Preview New Financial Regs


Fresh off their victories in raising mortgage interest rates, pulling hundreds of billions of dollars in investment out of the private sector and failing to make sneaky end-runs around the president, Treasury Secretary Timothy Geithner and National Economic Council director Lawrence Summers are teasing their latest fool-proof scheme: an overhaul of U.S. financial regulation.

In an op-ed in today's Washington Post, the two long-time, extremely active participants in the financial bubble now have a five-point plan to ensure things continue to run smoothly. Like most five-point plans, this one contains seven points. Here they are:

  1. Raise "capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms."
  2. Subject "large, interconnected firms" to consolidated supervision by the Federal Reserve and give broad discretion to a council of regulators across the financial system.
  3. Impose "robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies" and "require the originator, sponsor or broker of a securitization to retain a financial interest in its performance."
  4. Subject all derivatives contracts and derivatives dealers to regulation.
  5. Offer a "stronger framework for consumer and investor protection" against so-called predatory lending. 
  6. Establish a "resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system."
  7. "Lead the effort to improve regulation and supervision around the world."  

The legally required "some will say" graf dismisses the argument that overhauling the regulatory system should "wait until the crisis is fully behind us." The response is that these critics misunderstand the nature of the current "crisis of confidence and trust." Geithner and Summers promise they will be "reassuring the American people that our financial system will be better controlled."

This is horse pucky. The crisis in confidence and trust is the cure, not the disease. Banks are not lending because there are are too many bad risks out there. People aren't getting loans because they can't establish their creditworthiness. And the reason for that isn't some baloney about mass psychology or people needing to be protected from themselves. It's because about 20 percent of Americans have demonstrated that they must never be loaned money on any terms.

Lending at interest is among the most important inventions in history, on a level with the printing press and internal combustion in creating the comforts of the modern world. A substantial portion of Americans decided to piss all over that gift. Their government enabled them. Now it's looking to give them even more help – along with bandaids like the requirement that MBS originators have to take part of the risk they package (a good idea, but one that's better imposed by sadder and wiser buyers of mortgage-backed securities than by the government).

But if the regulatory overhaul described above won't do much besides moving the next bubble to some other area of the economy, it will succeed in regulation's oldest, truest goal of propping up existing players and creating new barriers to entry for anybody who might challenge them. Rest assured that Goldman Sachs and JPMorgan Chase will make noise about how the new liquidity, reserve and reporting requirements are tough, challenging and a step in the right direction. Editorial boards will swoon that "even industry leaders agree" on the need for the new regs. Things will look a little different if you're not either owned by or on a first-name basis with the secretary of the Treasury. And if Tim and Larry get anywhere with point number 7, you won't even escape the new regime by fleeing to the Cayman Islands.