Treasury Secretary Timothy Geithner came to Capitol Hill Wednesday to talk up the administration’s plans for a Consumer Financial Protection Agency and address lawmakers’ concerns about firms that are too big to fail. But in Geithner brushing aside worries about over-regulation, he seems to have created more questions than answers.
In his prepared testimony before the House Financial Services Committee, Geithner argued that the need for a "dedicated, consolidated consumer protection agency" is clear because the old system failed to save consumers from feeling the brunt of the economic crisis.
"Did that system work?" Geithner asked rhetorically during the hearing. "How well did it do?"
But lawmakers, particularly Republicans, remain concerned about regulatory mission creep. They worry that a new agency will create an increased burden on community banks. They’re concerned about a reshuffling of regulatory powers as the crisis continues, and about turf wars between the agencies.
"You can’t expect them to do anything different," Geithner said, in response to criticism that the Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators are concerned about losing their current supervisory authority. "Our job is to figure out what’s right for the country."
The Treasury Secretary says that the administration has dropped its proposal that financial institutions offer "plain vanilla" versions of finanicial products, which critics have argued takes too much risk out of the system.
In his prepared remarks, Geithner said the administration does not support the creation of a "fixed list" of Tier 1 financial holding companies, also known as firms that are too big to fail. However, he also said that identifying these firms "will not convey a government subsidy," leaving open an important question–how will the government treat large interconnected firms that could bring down the entire financial system.
By identifying these firms, the government could create an implicit guarantee that it will rush to the rescue of an ailing company, as it has done in the past year with Fannie Mae, Freddie Mac, Citigroup, American International Group, General Motors and others. Lawmakers argued that an administration with good intentions could actually end up giving more power to large firms.
"It was the big boys that damn near killed us all, not the little players," said Rep. Frank Lucas, R-Okla.