(CNSNews.com) – Treasury Secretary Timothy Geithner told Congress that the administration planned to fix the “basic regulatory flaws” that it thinks caused the financial crisis by instituting more regulations and creating a new regulatory agency to oversee all financial products.
Geithner, testifying before the House Financial Services Committee on Friday, told lawmakers that Obama’s proposal would address the “core causes” of the nation’s financial collapse as well as any problems in the future.
“The president’s plan focuses on the essential reforms,” Geithner said. “It addresses the core causes of the economic crisis. It addresses the areas critical to confronting future vulnerabilities.
“And, in pursuing what amounts to the most extensive overhaul of our financial regulatory regime in decades, it makes clear to the American people that their government, at an early stage in this administration, is intent on fixing the basic regulatory flaws that caused extensive damage to businesses and families,” he added.
Rep. Jeb Hensarling (R-Texas) said that the problem was not one of more or less regulation, but one of smart or “dumb” regulation. Hensarling argued that there was ample room for smarter regulation, rather than sweeping changes.
“Our economic turmoil has not arisen from deregulation, but from dumb regulation,” Hensarling said. “That and regulators who did not lack adequate regulatory authority, but may have lacked adequate judgment.”
“When you have the wrong diagnosis, you will in turn offer the wrong remedy, and that is exactly the case with the administration’s proposal before us,” he said.
Hensarling criticized the Obama proposal, arguing that there was no way the administration could address the core causes of the crisis and ignore reforming Fannie Mae and Freddie Mac, the two government-backed mortgage giants at the heart of the financial crisis.
“I’m simply taken aback by the lack of reform of Fannie Mae and Freddie Mac, the epicenter of the financial crisis,” he said. “Rather than changing the current status quo for these GSEs [Government-Sponsored Enterprises], the administration’s plan institutionalizes the problem. When President Obama references sweeping reform, I didn’t know he meant sweeping Fannie Mae and Freddie Mac under the rug.”
Democrats said the proposals were what the doctor ordered. Rep. Mel Watt (D-N.C.) said the fact that no one entirely agreed with it proved that it was a “resounding success.”
“Often the definition of a good compromise is one that leaves everybody unsatisfied,” Watt said. “Measured against that criteria, the administration’s proposal for restructuring is a resounding success.”
Committee Chairman Barney Frank (D-Mass.) defended Fannie and Freddie, saying they were not a problem now that they were completely under federal control.
“The notion that there is an unbridled Fannie Mae and Freddie Mac out there is mythic,” said Frank. “It is not the case that they are now the way they were. They are under conservatorship.”
Frank compared the two companies, which have received $85 billion in government assistance, to public utilities, saying they are serving an important function in resolving a housing crisis they helped create.
“They are in fact serving as, not what they used to be, but as almost a public utility, in terms of the financial [and] mortgage crisis. They are not what they were,” he said.
Geithner defended the administration’s proposals, saying that the “only” solution was a new, single, government regulator with the ability to regulate “all firms” that could pose a risk to the economy.
“We believe that the only viable solution is to provide a single entity, within the government, with a clear mandate for consumer protection in financial products and services and clear authority to write rules and enforce those rules,” said Geithner.
“We propose to give this new agency jurisdiction over the entire marketplace,” he said. “This will provide a level playing field where the reach of federal oversight will be extended, for the first time, to all financial firms.”
This new agency, the Consumer Financial Protection Agency (CFPA), would govern financial firms of all shapes and sizes, from the largest banks to the tiniest of pay-day lenders. Geithner said that the CFPA would be sending examiners into these non-bank agencies to “review their files” and “interview” their employees.
“It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion,” Geithner said.
Hensarling disagreed, criticizing the CFPA as another arbitrary government agency whose mandates could stifle innovation and choice, affecting the lives of everyday Americans.
“The proposal represents one of the greatest assaults on consumer rights I have witnessed. The legislation will stifle innovation, from perhaps the next online banking service to the next frequent flyer mile offering. And worse yet, it will contract credit to our small business at a time of historic unemployment.”