The U.S. financial system will face another crisis – despite the future wisdom and experience of regulators – unless “unambiguous” restrictions on leverage and risk are placed on the largest institutions, said U.S. Treasury Secretary Timothy Geithner.
In an opinion piece written for The Washington Post today, Geithner called on both Republicans and Democrats to finalize in coming months viable oversight reform with tough restrictions that do not rely on “market discipline.”
He said the nation needs true reform to prevent the kind of crippling losses that caused markets to tumble and the government to bail out financial firms deemed “to big too fail.”
“We cannot build a system that depends on the wisdom and judgment of future regulators,” Geithner wrote. “Even the smartest individuals armed with the sharpest tools will not be able to find every weakness and preempt every crisis. Instead, the best strategy for stability is to force the financial system to operate with clear rules that set unambiguous limits on leverage and risk.”
Geithner said that conservative estimates puts the cost of the government’s primary bailout facility, Troubled Asset Relief Program, TARP, at $117 billion. That is less than initially thought, but the Treasury secretary said the “Financial Crisis Responsibility Fee” proposed by President Obama in January – a fee imposed on the largest financial institutions – would bring the cost to American taxpayers to zero.
“The true cost of this crisis, however, will always be measured by the millions of lost jobs, the trillions in lost savings and the thousands of failed businesses. No future generation should have to pay such a price,” Geithner wrote. “It is simply unacceptable to walk away from this recession without fixing the system’s basic flaws that helped to create it.”
In coming weeks, the Senate will debate a bill that won partisan approval out of the Senate banking committee that calls for a $50 billion fund to dismantle any firm that may pose a threat to the economy. But Republicans and banking and business groups oppose many of the measures as over-regulation.
The reform bill by Senate Banking Chairman Christopher Dodd, similar to one that passed in the House in November, would also create a Bureau of Consumer Financial Protection with rulemaking authority over mortgages, credit cards and other common financial products.
In addition, banking institutions would be prohibited from risky proprietary trading, while derivatives speculation would be heavily regulated among all traders.
“A clear lesson of this crisis is that any strategy that relies on market discipline to compensate for weak regulation, and then leaves it to the government to clean up the mess, is a strategy for disaster,” Geithner wrote.
