When it comes to financial reform, former U.S. Treasury Secretary Larry Summers is nothing if not a realist. In an exclusive interview with DailyFinance, Summers, who leads the White House's economic council, explained how the Obama administration's current plan for financial reform addresses several of the causes of the recent financial crisis. But asked if current proposals would prevent another financial crisis, he equivocated.
"Huge accidents or crashes always have multiple 'but for' causes, in the sense that without multiple events, they might not have taken place," Summers said following his appearance at the annual Templeton Lecture at the National Constitution Center in Philadelphia on May 27 (See transcript). "This legislation seeks to operate at multiple levels to eliminate the kinds of things that can cause crises."
The first problem he addressed was the housing bubble. Summers believes that had the proposed new Consumer Financial Protection Agency been in place earlier, then it, along with a reform of ratings agencies and changes to some securitization practices, would have prevented the housing bubble from growing so large. Second, he thinks that had proposed new regulations of financial institutions been implemented prior to the crisis, firms like Lehman Brothers, Bear Stearns and AIG would have been more likely to have had enough capital to have avoided insolvency.
Finally, if the government had had resolution authority over financial institutions, as proposed in current legislation, it "would have prevented the kind of choice between chaos on one hand and massive taxpayer bailout on the other," says Summers. The controversial 'resolution authority' provision in the current reform bill now making its way through Congress, would allow the government to essentially take control of financial institutions in crisis and dissolve them in an orderly fashion to prevent the damage from spreading to other firms.
Summers stopped well short of saying that the Obama administration's proposed changes would prevent another financial crisis from happening in the future -- and even short of saying definitively that they would have prevented the most recent one. The best regulators can realistically hope to do, he implied, is try to stop history from repeating itself.
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