The White House is set to unveil its much-anticipated revamp of the financial regulatory system this Wednesday, reports WSJ. Among the big, new changes: The Federal Reserve is set to get the power to unwind and shut down large institutions as the FDIC currently has for more plain vanilla banks.
There will also be a new, specifically consumer-oriented regulator, which you may call the Elizabeth Warren position, since it’s a notion she’s advocated a long time.
WSJ: After Mr. Obama details his proposal, the process will quickly move to Capitol Hill, where Congress would have to pass legislation to enact the changes. Treasury Secretary Timothy Geithner is scheduled to appear before both Senate and House panels on Thursday, where he is likely to face questions and criticisms.
Lawmakers are expected to take issue with several of the plan’s more thorny issues, including how to create a system that won’t simply bail out large financial companies when they topple. Giving the Fed more clout — in light of recent criticism from lawmakers, both Republican and Democratic, of its secrecy and accumulation of power — will also be a controversial idea.
These concerns are pretty legitimate. Simply being able to unwind a large bank, like Citi (C) isn’t enough. It’s not even, really, the problem we faced. The problem we face is that Citi is deemed “too big to fail” or too big not to bail out its counterparties, which is not a problem that goes away with a Fed that has the authority to take Citi into receivership. You still have to figure out how you can have a financial system where no institution or institutions are so important that they can fail without threatening the entire society.
While the new regulations will apparently have safe guards to prevent another crisis from happening (leverage ratios, etc.) that still doesn’t answer the question, because we actually do want a system that allows for failure.