Obama Spells Out Financial-Rules Overhaul

(WASHINGTON) — President Barack Obama proposed sweeping new "rules of the road" for the nation's financial system Wednesday, casting the changes as a critically important response to the economic crisis and the greatest regulatory transformation since the Great Depression.

Obama blamed the financial crisis on "a culture of irresponsibility" that he said had taken root from Wall Street to Washington to Main Street, and he said regulations crafted to deal with the depression of the 1930s had been "overwhelmed by the speed, scope and sophistication of a 21st century global economy." (Read "What the Stress Tests Didn't Tell Us")

The Obama plan would give new powers to the Federal Reserve to oversee the largest and most interconnected players in the financial world. It would create a council of regulators, led by the Treasury Department, that would police the entire financial system for risky products.

The plan also creates a new consumer protection agency to guard against credit and other abuses that played a big role in the current crisis.

Obama, speaking from the White House, attributed much of the country's current problem to "a cascade of mistakes and missed opportunities" that occurred over decades. His initiative would reverse a campaign begun in the 1980s by President Ronald Reagan to cut back on federal regulations.

The Obama plan would give the Federal Reserve new powers to oversee the entire financial system, hoping that the central bank will be able deal with the kinds of problems that were allowed to build to such an extent that they ended up overwhelming the system last year, resulting in the collapse of some of America's largest financial institutions.

The Obama proposal would also create a new consumer protection agency to guard against the kind of mortgage and other credit abuses that played a major role in the current crisis.

Two lawmakers whose committees will play a major role said they would move quickly. "We'll have it done this year," Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said after Obama's address.

"Absolutely," agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. He joked that the White House had "threatened us with a severe chastening if we don't." (Read "Paying Back TARP: Good for Banks, Bad for Investors?")

"There will be maybe some debate ... but I think we're all seeking the same results," Dodd said. He has advocated an alternative plan to strip the Federal Reserve of its regulatory role entirely and create a new consolidated bank regulator who would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks. "There's not a lot of confidence in the Fed at this juncture," Dodd said.

Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in "unusual and exigent circumstances," a change designed to mollify critics who charged that the Fed needed to be more accountable in exercising its powers as a lender of last resort.