WASHINGTON — President Obama proposed sweeping new "rules of the road" for the nation's financial system Wednesday, casting the changes as a critically important response to the economic crisis and the greatest regulatory transformation since the Great Depression.
Obama blamed the financial crisis on "a culture of irresponsibility" that he said had taken root from Wall Street to Washington to Main Street, and he said regulations crafted to deal with the depression of the 1930s had been "overwhelmed by the speed, scope and sophistication of a 21st century global economy."
The Obama plan would give the Federal Reserve new powers to oversee the entire financial system, hoping that the central bank will be able to deal with the kinds of problems that were allowed to build to such an extent that they ended up overwhelming the system last year
The proposal also would create a new consumer protection agency to guard against the kind of mortgage and other credit abuses that played a major role in the current crisis.
Two lawmakers whose committees will play a major role said they would move quickly.
"We'll have it done this year," said Sen. Chris Dodd, D-Conn., chairman
of the Senate Banking Committee. "Absolutely," agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.
Dodd said there could be "some debate ... but I think we're all seeking the same results."
Dodd has advocated a plan to strip the Federal Reserve of its regulatory role and create a new bank regulator who would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.
"There's not a lot of confidence in the Fed at this juncture," Dodd said.
Asked about Dodd's criticism of the central bank, Treasury Secretary Timothy Geithner said the administration had looked at alternatives to giving the Fed expanded powers and had come to the conclusion that "we do not believe there is a plausible alternative."
Lawrence Summers, head of the president's National Economic Council, said that those who believed this power should not reside with the Fed had the responsibility to make the case for some other agency.
The Fed's expanded authority and the rest of the new rules would reach into currently unregulated regions of the financial markets, such as hedge funds and exotic instruments like credit default swaps.
The plan was the result of extensive consultations with members of Congress, regulators and industry groups and represented a compromise from bolder ideas that the administration had examined but ended up abandoning.
The overhaul would eliminate only one agency, the Office of Thrift Supervision, generally considered a weak link among banking regulators.
"There's still going to be holes in the system," said Douglas Elliot, a fellow at the Brookings Institute and a former investment banker. "The problem with having too many regulators is that things can slip through the cracks. Banks will find ways to move businesses into units that are regulated by the softest regulator."
The creation of the new consumer agency is aimed at guarding against the kinds of lending abuses that resulted in many Americans being saddled with more mortgage debt than they could handle. That caused a record flood of foreclosures and billions of dollars in losses on loans and securities backed by subprime mortgages.
"It was easy money," Obama said. "But these schemes were built on a pile of sand."
Under his plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the U.S. financial system. But even as it gained new powers, the Fed would lose some banking authority to the new Consumer Financial Protection Agency.
Private analysts generally gave the administration good marks for what it had put forward, but some powerful lobbying groups, such as the U.S. Chamber of Commerce, expressed opposition to parts of the plan.