Lawrence Summers, the director of President Obama's National Economic Council, defends the president's financial regulatory reform plan, saying it will result in a "very different financial industry." Summers adds that having a new agency separate from bank regulators is the best way to protect consumers.
In an interview Thursday with NPR's Robert Siegel, Summers brushed aside the judgment of New York Times columnist Joe Nocera that the administration's plan is "little more than an attempt to stick some new regulatory fingers into a very leaky financial dam, rather than rebuild the dam itself."
Not so, says the former Treasury secretary. "Respectfully, the clamor of concern — particularly about the consumer regulation from financial industry lobbyists — suggests that they don't share Mr. Nocera's view. More profoundly, this is about reducing leverage, causing there to be more capital, getting rid of the gaps. And that's exactly what we're going to do. I think financial practice is going to be very, very different in that when we look back a few years from now, we're going to see a very different financial industry."
Some critics have also asked whether more profound changes are needed at the Federal Reserve to protect consumer interests. Summers says there has been "a lot of soul-searching" at the Fed — something he expects will continue.
"I think the critics are right that an agency charged with maintaining the health of the banking system is always going to be prone to look out for bank profits rather than consumer interests, and that's why we've established a separate consumer agency," he says.
In the U.S. and around the world, Summers says, central banks play a key role because of their technical expertise with risk modeling. The Fed has been a "highly imperfect actor — it's made serious mistakes," he says.
"On the other hand," he says, "I think it's important to remember that some of the worst cases — Countrywide, Washington Mutual — involved institutions that actually moved away from the Fed's regulation and were allowed to because they thought the Fed's regulation was too tough."
The new financial regulatory legislation calls for the creation of a separate agency, independent of the Fed, to look out for consumers. Summers says the establishment of the Consumer Financial Protection Agency is "one of the key pillars" of the plan, which also calls for eliminating gaps in financial regulation and creating an authority to handle failed financial institutions.
"The entire regulatory system has to be changed in fundamental ways to protect consumers," he says.