Treasury Secretary Henry Paulson Thursday urged cooperation to help solve the financial crisis, asking authorities to put aside both their domestic political animosities and their international rivalries to help ease the turmoil.
Paulson, who has led the Bush Administration's attempts to fight the financial crisis that has rocked the economy lately, also outlined the goals he would have for regulatory changes in the wake of the turmoil, saying that a previous blueprint he put forward before the crisis has turned out to be "remarkably appropriate."
"The key to success is pro-active, creative collaboration," the Treasury secretary said of fighting the crisis, according to a text of the prepared remarks
"In the United States, this means Democrats and Republicans must cooperate and manage an unprecedented situation, and find solutions that restore and maintain our national economic well-being," Paulson argued. "Globally, it means sovereign nations working together to protect economic and social stability."
Paulson, who delivered his remarks at the Ronald Reagan Presidential Library in Simi Valley, California, blamed government inaction and ineffective regulation for at least part of the crisis, but said that the right tools are now in place to maintain stability in the financial system.
In assessing the financial crisis, Paulson argued that many factors led to the turmoil, including "government inaction and mistaken actions, outdated U.S. and global financial regulatory systems, and by the excessive risk-taking of financial institutions."
However, the Treasury secretary added that he, along with the Fed and the FDIC - the other major U.S. regulators working to fix the crisis - now possess "the tools and the commitment to do what is necessary to maintain the stability of our financial system."
Paulson called the current debate about how the regulatory framework should be set up in the wake of the crisis the "most significant discussion of financial system reform in the last 60 years." However, he noted that changing the system is a decision with both great opportunity and "great peril."
"My regulatory reform views are based on the principles of transparency and accountability, and my belief that our entrepreneurial nation must continue to foster prudent risk-taking, while not rewarding failure or encouraging recklessness," Paulson told his audience.
He warned that "adding new regulations won't be a long-term solution" and argued that what was needed was "more effective regulations within an entirely new regulatory framework and a stronger capacity for resolution and crisis intervention that reinforces market discipline."
Paulson discussed the government response to the crisis in detail, outlining the lessons of each major step leading up to the passage of the $700-billion financial relief package that was created last month.
On the collapse of Lehman Brothers, the Wall Street investment bank that the government allowed to go bankrupt - a failure that prompted a credit crisis that had drastic ripple effects - Paulson again stated that he did not have authority at the time to save the company.
This argument has been repeatedly put forward by Paulson and Federal Reserve Chairman Ben Bernanke, who have both received criticism for their decision to let Lehman fail. Both men have repeatedly stated that the impact of Lehman's collapse was what pushed them to ask Congress for the passage of the financial relief bill.
In Thursday's speech, Paulson also gave his response to the government's takeover of Fannie Mae and Freddie Mac, two mortgage giants that controlled much of the market due to a competitive advantage stemming from the fact that they had been chartered by Congress.
The special nature of these GSEs, or Government Sponsored Enterprises, made it impossible for the government to let them fail when the meltdown in the subprime mortgage market pushed them near collapse earlier this year.
"The conservatorship is a temporary condition, a 'time out' period where the new President and Congress must decide what role government in general, and the GSEs in particular, should play in the housing finance market," Paulson said, referring to the government takeover of the firms.
Calling for "decisive action" by the next president and the next Congress, Paulson went on to say, "In my view, government support needs to be either explicit or non-existent, structured to resolve the conflict between public and private purposes, and policymakers must address the issue of systemic risk."
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