WASHINGTON The Bush administration said Thursday that the Federal Reserve should be given sweeping new powers to protect the integrity of the financial system, contending that this year's market turmoil had exposed a badly outdated regulatory system.
While acknowledging that congressional debate on the issue would take time, Treasury Secretary Henry Paulson said the discussion should begin without delay, because the stakes for the financial system are so high.
"We should quickly consider how to most appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene to protect the system so they can carry out the role our nation has come to expect stabilizing the overall system when it is threatened," he said in a speech to a women's banking group in Washington.
Paulson said the near-collapse of Bear Stearns, once the country's fifth-largest investment bank, had "placed in stark relief the outdated nature of our financial regulatory system."
Because of the problems highlighted by the ongoing credit crisis, Paulson said, "We must dramatically expand our attention to the fundamental needs of our system and move much more quickly to update our regulatory structure."
Later, responding to an audience question about how quickly the reform could be approved, Paulson said, "Do I have an expectation that it will get done this year? Probably not ...but it needs to be focused on soon."
The Fed moved in March as Bear Stearns teetered on the brink of collapse to provide $30 billion to facilitate the sale of Bear Stearns to JP Morgan Chase & Co. and for the first time to begin lending money to other investment banks, something it has continued to do as it works to calm financial markets in the wake of a severe credit crisis.
Paulson said the country had come to rely on the Fed in times of crisis, citing the central bank's actions to broker a rescue of giant hedge fund Long Term Capital Management in 1998 during the Asian currency crisis and the Bear Stearns episode this year.
On March 31, Paulson released a blueprint that proposed the most sweeping overhaul of the nation's financial regulatory system since the stock market crash of 1929. It would change how the government regulates thousands of businesses, from the nation's biggest banks and investment houses to local insurance agents and mortgage brokers.