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Opinion

EDITORIAL: Fiscal restraints must protect taxpayers

If there's one thing most people can agree on in this politically fractious, economically tumultuous time, it's that Washington can't let Wall Street do this to us again.

Seeing to that has to be the overriding goal as Congress crafts new regulations for the financial services industry, whose risky, greedy behavior ravaged the economy - laying nest eggs, jobs and property values to waste - and left shaken taxpayers with the bill for cleaning up the mess.

The financial system is stronger today than it was 18 months ago. But it's still operating under the rules that led to its near collapse. That has to change. But in an arena littered with complex creations like derivatives and credit default swaps, how's the public to know which reforms will do the job? And do it without hobbling an industry essential to the economic vitality of New York and the nation - and without being vindictive as Wall Street profits and bonuses soar, hopefully along with the taxes paid in New York.

To inspire confidence, reform has to achieve a few key objectives.

It should create an early warning system to sound the alarm when the economy is threatened. It should establish an orderly process for dismantling large, failing companies. It must ensure that Wall Street - and not taxpayers - picks up the tab if things fall apart again. And it should establish a strong consumer protection agency to head off corporate abuses and consumer recklessness.

The Financial Crisis Inquiry Commission, established to analyze what caused the meltdown, will issue its report Dec. 15. Earlier would be better. The House has already passed a reform bill. The White House has weighed in with its proposals. And a bill finally surfaced last week in the Senate Banking Committee.

All three address the essential, core elements of meaningful reform. But they differ in the details. So expect a lot of wrangling in the weeks and, maybe, months ahead. There will be turf fights among existing regulators. And the industry's lobbyists will try to stave off as much new regulation as they can. Proposals will be sliced, diced, amended and blended in the usual legislative way. But what emerges at the end needs to be strong and workable.

 

Washington has plenty of regulators. But none with the sole job that is envisioned for a new financial stability oversight council: of constantly being on the lookout for companies, products and practices that, unchecked, could cause the financial system to collapse.

To do that job effectively will require federal regulation of businesses like hedge funds and private equity firms. They should be required to keep more cash on hand to cover their risky bets. And it may mean preventing banks from becoming "too big to fail" by barring them from owning those sorts of proprietary trading operations.

What's important is that, in one way or another, reform must limit the risk that the sprawling operations of giant firms pose to the economy.

Making sure officials can spot trouble brewing will also require regulating the trade in exotic financial products, like over-the-counter derivatives, that have escaped oversight. That market exploded from $91 trillion in 1998 to $592 trillion in 2008, according to the Senate Banking Committee. And it was the lack of transparency about the nature of those toxic assets, and how many of them individual banks had on their books, that caused credit to dry up. Banks didn't trust other banks because they couldn't gauge how sound they were. And banks, facing losses, hoarded cash that would otherwise have been available for consumer and business loans.

When things go bad like that, government needs the authority and the tools to efficiently isolate and dismantle failed companies whose demise could drag the rest of the system down the tubes.

To make sure that taxpayers won't be left holding the bailout bag again, the financial services industry - including institutions large and small - should be required to put up the money, in advance, for future rescues. Consider it catastrophic insurance. Financial firms reap the rewards when their risks pay off. They should take the hit when they don't.

Finally, consumers need to be protected from the deception and abuse of rapacious companies, and from the fecklessness of fellow consumers.

 

Government can't stop people from making dumb financial decisions. But it should make sure that contracts, mortgages and the like are clear and fair, and that companies adhere to sound lending practices. For instance: making sure that borrowers actually have the ability to repay. The idea isn't to save us from ourselves. It's to make sure that the irresponsible behavior of some consumers - like taking subprime or no-documentation mortgages they could never repay - won't mushroom to threaten the financial system.

The federal government already has the authority it needs to look out for consumers. But it's spread among regulatory agencies focused on other responsibilities. It should be somebody's No. 1 job.

Washington needs to get all this done right. And because regulatory uncertainty impedes economic activity, it needs to get it done soon. hN

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