In Forceful Terms, Geithner Calls for Strong Financial Reform

Treasury Secretary Timothy Geithner made a forceful case for muscular financial reform, saying before the American Enterprise Institute (AEI) on Monday, March 22, that the financial crisis was the result of lax attitudes and outdated policies.

In a speech in Washington hosted by AEI, the conservative think tank, Geithner said that the first reason for financial reform was that there was "something undeniably wrong with the economy."

Laying the recent historical groundwork for reform, Geithner cited clear-cut reasons: The collapse of the vaunted American financial system and that a conservative Republican President, George W. Bush, was forced to have the government step in to aid the gigantic lenders Fannie Mae and Freddie Mac, ask for a bailout of the banking system, and to lend billions of dollars to automakers.

Geithner blasted the lax attitudes on Wall Street and old, weakened government oversight rules that allowed bankers and mortgage brokers to evade regulations on an "appalling scale."

In another reason for reform, Geithner attacked the market's inability to police itself, pointing out that the "shadow banking system" ballooned to an untenable size because even though these financial firms were engaged in the business of banking, they were not being regulated as banks. Geithner said that this rogue banking system acted in full view of everyone and was allowed to grow as large as the real banking system. "That was market discipline in action," Geithner commented sarcastically.

He said that the failure of the financial system required Congress to "enact the strongest, most important financial reforms since those that followed the Great Depression."

Geithner said that a good start on the road to reform was the financial reform bill Senator Christopher Dodd (D-Connecticut) was moving through Congress. Dodd's bill was cleared March 22 by the Senate banking committee on a strict 13-10 party line vote, where the Democratic bill will be debated before the full Senate.

(Melanie Waddell reported March 24 that Dodd hoped to pass the bill before Memorial Day.)

Geithner emphasized that financial reform wasn't just a debate about the amount and type of regulation, but a "debate about ideas, and about the best ways to improve an undeniably flawed system; about the role of government; about the balance between efficiency and stability; about how to protect consumer choice and financial innovation, while constraining predation and fraud; and about getting the incentives right."

To read the full text of Geithner's speech, please click here.

To read more about Dodd's bill on InvestmentAdvisor.com, please click here.