September 23, 2009

Economic Outlook: Keeping the fires lit

U.S. Treasury Secretary Timothy Geithner warned Washington lawmakers complacency was no friend to regulatory reform, and taking no action was unacceptable.

Geithner told members of the House Financial Services Committee time is the enemy of reform, The Washington Post reported Wednesday.

As some normalcy returns to our financial system and our economy, we cannot let it be cause for complacency, he said.

In Wednesday's exchange -- and in hearings committee Chairman Barney Frank plans to begin as early as next week -- lawmakers and regulators will shape some grandiose ideas into solid proposals, such as the Consumer Financial Product Protection agency, a key component of proposals by President Barack Obama in June.

Geithner said one provision in the 88 pages of the Financial Regulatory Reform document assembled in June had already been pulled from consideration -- the idea that a new Consumer Financial Protection Agency might take simplicity to the level of defining standards as plain vanilla.

The concept was to create financial products that are easy to understand, but in practice, critics said, it was a heavy-handed approach to limiting choice and stifling innovation.

There has been a lot of concern that if you invest the government with the ability to decide what's appropriate here and there, that will lead to less competition and choice, Geithner said, deferring to Frank's own proposal, which skipped that provision, The New York Times reported.

The chairman's proposals, which I've had a chance to quickly read, provide a better balance of choice and protection, Geithner said.

It is a week, of course, in which regulators could find themselves with sore necks.

Beyond the scuttlebutt in Washington, policymakers focused on the Group of 20 summit in Pittsburgh, where topics of discussion will include China's concern with President Obama's recently announced tariff on Chinese tires and steel; Europe's concerns over bank compensation policies that encourage careless risk-taking; and the balance of trade among emerging, export-oriented economies of China, Brazil, Russia and India, and developed, consumer-oriented economies, like the United States and Europe.

Neither last, nor least, on the agenda, central bank governors and others will hold discussions on winding down the extraordinary measures used to prop up the markets through the year of the Great Recession.

One extraordinary measure left alone showed the light touch that will be needed in the coming year. The U.S. Federal Reserve said Wednesday it would leave key lending rates unchanged, at zero to 0.25 percent and U.S. markets immediately fell hard Wednesday afternoon.

The Dow Jones industrial average, less than 100 points from the symbolic 10,000 point mark, suddenly turned south, closing 81 points lower on the day. Fiddling -- and sometimes not fiddling -- with monetary policy can show quick returns -- some up, some down -- from a powerful constituency generally known by the generic term: Investors.