Under the Obama plan, the Federal Reserve would get new authority to police all financial institutions — not just banks — whose failure could threaten the financial system. And the government would have new powers to wind up the affairs of financial institutions other than banks, such as insurance companies. Hedge funds would be compelled to register with the Securities and Exchange Commission and a new agency would be created to safeguard consumers against overly complex or fraudulent financial products. The new regulatory blueprint would “protect America’s consumers and our economy from the devastating breakdown that we’ve witnessed in recent years,” Obama said.
Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight,” the president said. “Our entire economy has been undermined by that failure.”

The Obama plan also breaks with the pre-crisis period by attempting to head off financial bubbles before they form. Greenspan maintained that central banks could not “definitively identify” bubbles until after they had burst. Rather than attempt to prick bubbles before they grew dangerous, it was better, he said, to clean up after they popped.

“The president does not accept the judgment that it’s best to let the market forces rip and then when there’s an accident, to clean up after. He believes the last two expansions have, to an extent, been bubble driven, and it’s important the next expansion rest … on a new foundation and a much stronger foundation,” Larry Summers, director of the National Economic Council, told reporters Wednesday afternoon.
Increased powers for Fed

Among the most controversial elements are expanded powers granted the Fed. The central bank, which controls the nation’s money supply and supervises the banks, would become the financial system’s uber-regulator. The Fed missed the housing and credit bubbles while they were inflating, badly underestimated their costs when they did pop and already has a full plate, critics say. With the Fed already engaged in numerous unconventional interventions in financial markets, some worry that adding a new role could backfire.

“I’d rather that the Fed stick to its knitting of conducting monetary policy and be the lender of last resort, as opposed to take on the role of supervision of individual institutions. … In this role, the Fed will be thrust into the center of controversy,” said Hal Scott, a professor at Harvard Law School and director of the influential Committee on Capital Markets Regulation, a private-sector body.

But administration officials say they carefully considered alternatives before opting to task the Fed. Countries that place key supervision authority outside the central bank don’t operate well in crisis situations, Geithner said.

“I do not believe there’s a plausible alternative that would create the necessary degree of confidence, accountability, responsibility and authority for protecting us against some of the risks we faced in this crisis,” he said.