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KATY CLARK: I'm Katy Clark and this is The World. Treasury Secretary Timothy Geithner was back on Capitol Hill today for the second time this week. On Tuesday, Geithner testified about the administration's response to the current banking crisis. Today, his focus was much more sweeping. Geithner laid out the administration's thinking in broad strokes on setting up a new regulatory framework for the financial system. The goal here is to prevent the next financial crisis. The World's Matthew Bell reports.
MATTHEW BELL: What Geithner began to outline for lawmakers today is a deep overhaul of the way the federal government regulates the financial system. He's particularly concerned with “systemic riskâ€. That's banker-speak for “big and in troubleâ€. In other words, a financial firm that poses “systemic risk†is one whose sudden collapse would cause widespread losses for the whole financial system. Geithner said today that the government lacks the authority to determine which firms pose a systemic risk, and which ones should be taken over by the federal government. Geithner wants Congress to give this authority to a single agency – perhaps the Federal Reserve. His plan would also impose new rules on hedge funds, money market funds, credit default swaps, and derivatives. Geithner told lawmakers that these moves would help prevent future financial meltdowns like the one at AIG.
GEITHNER: You know, we're still in the midst of a very challenging period. And so I think it would be in the interest of the country for Congress to do everything they can to make sure we get broader tools so we can manage this effectively, because again, this will be less costly for the economy and less costly for the taxpayer if we're able to contain this more effectively now.
BELL: Geithner called for a stronger and more conservative regulatory regime that focuses on the stability of the financial system as a whole. Texas Democrat Al Green applauded Geithner's efforts.
GREEN: You're doing the right thing because the American people understand that “too big to fail†is the right size to regulate.
BELL: The devil is in the details, of course. And many details of the administration's plan are still unclear. Congress will have to sign off on a lot of these proposed changes. Geithner also acknowledged that these reforms would have to be coordinated with financial capitols overseas if they're going to have a real impact. And he said the issue would begin to be discussed at next week's G-20 summit in London.
GEITHNER: Our hope is that we can work with the Europeans on a global framework, a global infrastructure, which has appropriate global oversight so we don't have a Balkanized system at the global level like we had at the national level.
BELL: Kenneth Rogoff of Harvard University is a former Economist with the International Monetary Fund.
ROGOFF: Fortunately, the kind of proposals that Tim Geithner is making are really – are consistent with what most of the rest of the world has been already thinking.
BELL: Rogoff says the world's leading economies still have to reach a consensus on a global regulatory framework.
ROGOFF: We will almost certainly over the next four or five years need to create either a new global financial regulator, a new body akin to, say, the International Monetary Fund, or at least a treaty about the rules of global international finance, which would then be enforced somewhat like the World Trade Organization.
BELL: In the meantime, Rogoff says a signal from Washington that it's cleaning up its own mess is a good start. For The World, I'm Matthew Bell.
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