"We have a moment of opportunity," Tim Geithner told Congress on Thursday morning, while answering questions about the Treasury Department's far reaching proposals for regulatory reform of financial system oversight. "We don't want to lose that opportunity."
It would be easy to be cynical. Conservative critics probably hear echoes of Rahm Emmanuel's shark-like "never waste a crisis" credo. Liberal critics are already arguing that Geithner's long affiliation with Wall Street makes him the fox who wants to guard the hen house. But the striking thing about Thursday's morning hearing before the House Financial Services committee was how seriously both Republican and Democratic politicians were taking their job.
I've watched a lot of CSPAN in the last six months, and seen endless displays of pointless grandstanding and stunning revelations of ignorance. Tim Geithner, more than any other administration official, during either the waning Bush or the waxing Obama eras, has been the target of the most relentlessly hostile questioning from both parties.
But partisan sniping and Congressional suspicion took a back seat to the problem at hand on Thursday. And for good reason. The Washington Post called Geithner's plan, which includes a systemic risk regulator that will have the authority to wind down bank holding companies and non-bank financial institutions, tighter oversight of derivatives trading, and increases in capital requirements for large financial entities, a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers." The Wall Street Journal described the plan as meaning "significant expansions of power for the Treasury, Federal Reserve and other regulators."
To understand just how profound the implications of Geithner's proposals are, one only has to compare it with his predecessor's plan for regulatory reform, which debuted exactly a year ago. Just for fun, let's quote Hank Paulson's recommendations for derivatives oversight reform:
The SEC should also consider streamlining the approval for any securities products common to the marketplace as the agency did in a 1998 rulemaking vis-a-vis certain derivatives securities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions and increase product innovation and investor choice.
That's right, just a year ago, Hank Paulson was proposing that we make it easier for new securities products to enter the marketplace.
Times have changed. No matter what your ideological predispositions, there is simply no getting around the manifest failure of the regulatory status quo. The biggest financial disaster since the Great Depression will ensure that changes are made that guide how government intersects with the private sector for decades to come. That is a big deal -- in some senses, the biggest deal. Judging by the substantive questions and concerns that legislators directed at Geithner, they understood this. They don't just not want to lose the opportunity to shape the future, they desperately don't want to screw it up.
But underneath all the details, such as whether the FDIC or the Treasury would have the power to close down a bank holding company like Citigroup, or exactly how the government would go about defining what kind of institution would pose "systemic risk" if it failed, or what the exact level of capital requirements will be appropriate, there was one significant question that wasn't being asked, at least not directly. And that was: If we change the rules, will you enforce them?
It's not often that you see leftwing critics like economist Dean Baker and hedge fund traders on the same page -- but both have been saying slightly different versions of the same thing lately (albeit for different reasons): We've got plenty of regulation in place. Dean Baker says all the hoopla about needing a systemic regulator is overblown. The Fed, he says, is already the systemic risk regulator -- it just didn't have the will to do what was necessary with respect to AIG or the big banks. Meanwhile, one hedge fund trader quoted in the Journal complained that there were already plenty of hoops for the hedge funds to jump through. We don't need any more, he whined.
You can make a good case that Wall Street ran amok not so much because the rules allowed it do so, but because a tacit admission from government has been in place more or less since the election of Ronald Reagan that regulators wouldn't be too industrious in applying the rules. So the real question that should be asked of Tim Geithner is not: What are the details, but what do you plan to do?
Republican John Campbell of California came closest to making that point. He asked whether the Treasury Department's request for a resolution authority that would allow the government to close down a non-bank financial institution implied that the Treasury was anticipating the necessity to do exactly that in the near future. Geithner ducked that question, for entirely understandable reasons. There's no need to introduce any more fear and uncertainty into the marketplace than is absolutely necessary right now.
But imagine if Geithner gets what he wants. And then imagine that a combination of stress tests and the price discovery mechanism of the toxic asset repricing plan reveals that a Citigroup or a Bank of America is functionally insolvent. The excuse up to this point preventing nationalization or some kind of government-expedited bankruptcy has been that the government does not have the authority to seize a bank holding company or non-bank financial institution. But if Congress does its work, that excuse will no longer be available in the not too distant future. Today, Geithner talked the talk. Six months from now, we'll see whether he can live up to his bold promises.