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Paulson, Bernanke Woo House

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The Washington Post

Published: July 11, 2008

WASHINGTON - The nation's top economic policymakers took their campaign to rework financial regulation to Capitol Hill on Thursday, urging Congress to make major changes in the oversight of Wall Street firms and other financial institutions.

Calls by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben Bernanke for legislation intended to prevent a financial crisis like the one of the past year received a warm reception from the House Financial Services Committee.

"We have the power to respond if there are crises," Rep. Barney Frank, D-Mass., the committee's chairman, said at the hearing. "What we are looking for are rules that will make the crises less likely."

"We will begin working on this," he said, "And I hope that early next year we will be able to complete it."

Frank endorsed one proposal, advocated by Paulson, to give the Fed explicit responsibility and new powers to ensure the stability of the financial system, and asked if it was sufficiently urgent to enact it this summer.

"That will clearly take some time to consider and to get the legislation through," Paulson said.

He said there is greater urgency to create a new system to dispose of the assets of a failing financial firm in a way that would not cause broad economic distress. He acknowledged that, too, will take time.

"We both would like additional tools," Paulson said. "We're not saying take forever, but we recognize the fact that the regulatory structure hasn't been changed in a long time and ... that it's not going to be easy."

Paulson called for replacing the multitude of regulators that have varying missions and responsibilities with three that each have a coherent focus.

One would concentrate on market stability, another on the soundness of financial institutions that have federal guarantees, and the third on protecting consumers and investors.

"A major advantage of this structure is its timelessness and its flexibility," Paulson said. "Because it is organized by regulatory objective ... it can more easily respond and adapt."

Bernanke offered a narrower set of recommendations, along the lines of a speech he delivered Tuesday.

He favors giving the regulator of investment banks, currently the Securities and Exchange Commission, more explicit legal authority.

He wants the Fed to have more power to strengthen the nuts and bolts of the financial system, such as the systems banks use to settle payments to each other.

He also echoed Paulson's call to create a process for dissolving failed financial firms without causing a broader economic crisis.

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