Treasury Secretary Tim Geithner returns to Capitol Hill on Thursday and is expected to reveal a much anticipated list of Obama administration priorities for preventing future financial collapses.The financial crisis was the result of a large scale failure of risk analysis that crossed several regulatory hurdles. Like the flea that carried the Bubonic plague from some province in China on the backs of rats that infected all of Asia and Europe, the Democrats forced financial institutions to make loans to people who could not afford to repay them. They did this in the name of diversity and "community development." These bad loans did two things to trigger the financial crisis. They drove up prices as more "buyers" were brought into the market place and that in turn created more bad loans as people with somewhat better credit were forced to extend themselves to make home purchases at the higher prices.
Among the likely proposals: establishment of a regulator to monitor system-wide financial risk and stricter rules on so-called credit default swaps and other financial instruments that helped throw the markets in turmoil, financial experts say.
Geithner has so far kept mum about what he plans to detail. But he and Federal Reserve Chairman Ben Bernanke have recently dropped some big hints. In fact, every day this week Geithner has spoken publicly about the need for increased financial sector regulation.
Many experts believe the administration wants to announce a new regulatory framework before President Obama travels to London next week for a meeting of G-20 leaders. Many of those leaders have indicated they want to see the United States strengthen its regulatory system.
Another key part of the Treasury plan will be the establishment of a "consolidated regulator," Geithner and Federal Reserve Chairman Ben Bernanke said during a House hearing on Tuesday.
This person or agency would be charged with detecting risk throughout the financial system as opposed to looking at each individual company, Bernanke said.
Bernanke suggested the regulator would "look for weaknesses in regulation" and "try to provide an overview of problems in the financial system as a whole."
In attempting to deal with this added risk and create greater liquidity for making even more loans derivative dealers packaged the "riskier" loans with good loans and these were in turned hedged with even more instruments. The flawed assumptions in the whole packages was that real estate home loans would have a very low default rate, which was historically correct, before the Democrat flea worked its way into the system. The derivatives and their by products wound up compounding the risk rather than spreading them. Ultimately their value was so questionable that instead of creating liquidity they froze the market for almost all lending.
It is irrational to suggest that smart business people would have knowing assumed the risks presented by these transactions. These people don't make "bet your company" investments knowingly. Their own self interest keeps them from doing so. One of the reasons they have been exempt from closer regulations in the past is because they were assumed to have the sophistication and self interest to avoid these risks. Adding another regulator to try to figure this out is unlikely to avoid these problems in the future.
There were regulators who saw the flea in the works and tried to get Fannie and Freddie to stop the recklessness that led to the mess. They were denigrated or ignored by Democrats like Barney Franks and Chris Dodd. What we needed was a regulator who could have deloused the Democrats who were pushing this disaster.