Today, Treasury Secretary Timothy Geithner testified before the Senate Banking Committee at a hearing entitled “The Administration’s Proposal to Modernize the Financial Regulatory System,” to discuss the administration’s proposed regulatory overhaul. Although many members of the Committee congratulated Geithner and thanked him for his efforts, there were also many concerns voiced about both the administration’s plan and the country’s overall economic welfare.

The Committee gave the proposed regulatory changes a mixed reception, but there seemed to be general support for increased emphasis on consumer protection and the creation of an independent financial consumer protection agency. Committee Chairman Christopher Dodd (D-CT) went so far as to say that he believes that “stronger consumer protections . . . would have stopped this crisis before it started.” Secretary Geithner noted that the proposed new consumer protection agency “will serve as the primary federal agency looking out for the interests of consumers of credit, savings, payment and other financial products.” He also discussed proposed modifications to the role of the Federal Reserve, pointing out that, although the proposed plan would increase the responsibility and authority of the Federal Reserve to supervise large financial institutions and to act as a “first responder” in times of financial emergency, the consumer protection role that the Fed had played previously would now be undertaken by the new Consumer Financial Protection Agency.

The modified role of the Fed, however, seemed to be an issue of great concern for a number of the senators. Many expressed a concern that the increased governmental authority of the Federal Reserve would reduce the Federal Reserve’s independence. Ranking Member Richard Shelby (R-AL) expressed concerns that the increased responsibility would stretch the Federal Reserve too thin, stating that “I don’t think we can expect the Fed or any other agency can play so many roles.” Geithner responded by emphasizing the importance of the Fed’s independence and restating that, although the Fed would gain some responsibility, it would also lose its responsibilities relating to consumer protections. Further, Geithner claimed, the Fed is in the best position to take on responsibilities relating to oversight of the financial sector since it already supervises and regulates bank holding companies. He asserted that long-term financial stability cannot be reached simply by banning individual financial products, since those risks “will simply emerge in new forms.” Rather, Geithner suggested, stronger leverage and capital requirements for bank holding companies and other companies that present similar risks will give the financial system the necessary “shock absorbers” to deal with future economic crises.

Although some Committee members expressed concerns that the government may be overstepping its bounds, other members were concerned that the proposed changes will not go far enough. In response to questions about why there was not a more comprehensive overhaul (including a consolidation of the SEC and CFTC into a single agency), Geithner responded that the administration is “not proposing an elegant, neat structure in part because if you look at countries that have done that, there’s not sufficient improvement in outcomes” to justify changes on this scale. He did note, however, that the administration’s proposal would increase the similarities between the underlying statutes for the SEC and CFTC, and that this would be a necessary first step in any effort to combine the two bodies in the future.

Secretary Geithner was also scheduled to testify before the House Financial Services Committee today, but that hearing was postponed.