Last week, the U.S. government announced another component of the proactive method that it is applying to overcome the recession, which has now become a worldwide recession. During the last six weeks, the government has displayed extraordinary activism. Alongside with public expenditure to increase employment and measures to stop foreclosures and to stabilize the housing market, the government has carried out assessments of levels of capital among bigger banks. Additionally, it also approved programs to support consumer and small business lending and to deal with what now are called "legacy assets." Meanwhile, the Federal Reserve has held interest rates close to zero and continued injecting liquidity, even through the purchase of long term Treasury bonds.
However, as Treasury Secretary Timothy Geithner recognized, no measures had yet been announced to avoid financial crises in the future. For this purpose, Secretary Geithner has proposed, in his own terms, "comprehensive reform . . . Not modest repairs at the margin, but new rules of the game," to overhaul the regulation of the financial industry.
The proposed reform has two main components. In the short run, the government wants to have authority to intervene companies that can cause systemic damage, which it did not have to rescue AIG, the big insurance company. The second component seeks to tighten the regulation of those segments of the financial services industry which were mostly unregulated, such as derivatives trading, hedge funds, insurance companies and money market mutual funds.
Not many details of the regulatory reform were revealed. Representative Barney Frank, chairman of the House Financial Services Committee, said that legislation on the first component should be approved very soon, while the comprehensive reform could be done by the end of the summer.
Isaac Cohen is the former director of the Washington Office of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). He is a commentator on economic and financial issues for CNN en Espanol TV and radio.
