The economy might finally be turning around, but the Treasury secretary says it would be a "terrible mistake" to let the financial system go back to where it was at the peak of the boom.
Treasury Secretary Timothy Geithner says the U.S. economy might be showing the "first signs of recovery," but comprehensive reform to the financial regulatory system should remain an urgent priority.
Legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, has stalled in Congress, but Geithner told NPR's Robert Siegel in an exclusive interview that he is optimistic that major reforms will be passed.
"On the core things, the president will succeed in getting reforms that will provide stronger consumer protections and a more stable system," Geithner says. "There is very broad support for doing it, and the fact that you're seeing some resistance to this from some parts of the financial community just underscores the importance of doing it."
Geithner sent a broad outline of proposed changes to the regulatory structure to Congress on March 26, but lawmakers from both parties have expressed skepticism about parts of the plan, along with many banks and other financial services firms.
"We are having a tremendous fight on the Hill to bring about comprehensive reform in part because we are proposing to do things that the financial community finds inimical to their interests," Geithner says. "We can't afford to let the financial system go back to where it was in the peak of the boom. That would be a terrible mistake."
Changing The 'Rules Of The Game'
The final package, Geithner says, should include limits on how much capital financial institutions are required to maintain and the creation of a new agency to provide more robust and unified regulations of the nation's largest institutions.
"It is going to require comprehensive changes in the basic rules of the game," he adds.
The Obama administration is still looking to implement new restrictions on executive pay, although Geithner dismissed the idea of setting actual caps on pay and bonuses at individual firms.
"What we do need to do is make sure we're ending the process of excess bonuses not tied to risk, the kind of multi-year guarantees that helped lead to this crisis," he says. "We want to make sure that pay can be clawed back if risk materializes and that we're not rewarding failure."
For now, however, the contentious debate over health care has overshadowed other financial issues, while the apparent stabilization of the U.S. economy has undercut the urgency of the Obama administration's push to reshape financial regulations.
"It took enormously powerful action by this president and this Congress beginning early in this year to achieve what we've done so far," Geithner says. "The financial system is in the process of repair. Those are the first signs of recovery."
There are some positive economic signals. The stock market has bounced back from its low point and housing markets have started to pick up in some parts of the country, but consumer confidence remains low and borrowing by consumers dropped in July for the sixth consecutive month.
The latest report by the Federal Reserve says that "economic activity continued to stabilize in July and August," boosted in part by manufacturing.
But the Fed's Beige Book also notes that consumer spending remains soft. Unemployment is also expected to remain high for many months, sparking fears that a lagging consumer economy could end up cramping any recovery.
"This is still a very challenging economic environment. People are still suffering hugely, unemployment is unacceptably high, and growth is still very tentative," Geithner says.
"But you're seeing the early returns on that basic judgment to commit to fix this thing."
He also remains optimistic that financial institutions will end up supporting the Obama administration's reform efforts.
"Ultimately, the financial community will judge these things to be in their interest too," he says. "They are weakened by the mistakes some of them made. They all benefit from having clearer, stronger protections; so ultimately, I think we're going to get what we need."