A 'light touch'?

WASHINGTON-In a move to rein in a "culture of irresponsibility" in the financial sector, President Obama announced Wednesday new proposals for increased financial regulations. The plan represents perhaps the broadest change made to financial regulation since the Depression-induced passage of the Glass-Steagall Act in 1933, which set many of the rules for banking that are still in place today.

In an interview with The Wall Street Journal on the eve of the announcement, Obama said he would like the government to have a "light touch" in regard to the economy.

The president painted the new rules as a moderate approach, saying some will accuse the administration of going "too far" or "not far enough." The plan is the "product of broad-ranging individual consultations" with members of Congress, regulatory officials, executives from top U.S. financial firms, and lobbyists. While not ditching or consolidating current regulatory agencies, the plan creates a financial oversight council and expands the power of government arms like the Federal Reserve and the Federal Deposit Insurance Corp.

"We do not want to stifle innovation," the president said in his speech. "But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealings, we will actually promote a more vibrant market."

The recession "has called into question the basic fundamentals of our financial system," said a senior administration official, who gave a background briefing before the president's announcement.

But the administration's 85-page proposal must pass through another institution before it can become law: Congress. While the president has urged Congress to act quickly and pass the new rules by the end of the year, such comprehensive intervention in the financial sector will certainly face hurdles in the legislative body.

The reforms, if enacted, would expand the role of the Federal Reserve to oversee the "too big to fail" financial firms. All financial firms will face higher capital and liquidity requirements, and those in the securities market will be held to more "robust" reporting requirements, and derivatives transactions would go through a clearinghouse of sorts.

Eschewing future bailouts of companies like AIG, the plan gives federal agencies the authority to somehow "resolve" crises at large financial firms to prevent their failure-only in "extraordinary circumstances."

"No financial firm that poses a significant risk to the financial system should be unregulated or weakly regulated," the proposal reads.

The administration also proposes a new consumer protection agency, which among other things would require banks to offer certain types of mortgages to consumers.

Treasury Secretary Timothy Geithner and top economic adviser to the president Larry Summers penned an editorial in Monday's Washington Postdefending the administration's plan to "modernize" the regulatory system, saying, "[I]t is not enough to simply repair the damage."

"It feels pretty aggressive. It's very much this move to control and reduce people's ability to take risk," said Trent Hudson, an investments analyst in New York. "That to me is pretty scary. The reason that there's growth is that people take risk."

And this isn't the be-all end-all of financial regulatory reform-"more can and should be done in the future," reads the report.

"There has always been a tension between those who place their faith in the invisible hand of the marketplace-and those who place more trust in the guiding hand of the government. That tension isn't a bad thing," the president concluded in his speech.