GEITHNER: It's important to recognize that innovation is a good thing and to some extent risk management, knowledge, foresight, credit rating agencies, will always be behind, by definition. So what you have to do is to make sure the system has more cushions, more shock absorbers against the possibility that in the future some firm or some innovation gets to the point where it can cause basic risk.
So if you get that – those basic shock absorbers right you're going to make the system less vulnerable in the future to the desirable changes, innovation and structure that are going to have to happen.
MORAN: Give me an example of a shock absorber in this plan.
GEITHNER: We call it capital. Capital is the best shock absorber. So banks are required to preserve capital against losses. They didn't – we were not forced to hold enough. They're required to make sure that they have stable sources of funding, liquidity against the risk that people withdraw their deposits.
They did not have enough liquidity. Those are the two most important shock absorbers and if you get those thick enough, designed well enough and resilient enough, you can do a much better job of making the system less vulnerable to this.
MORAN: Do you want to see in the ideal world, a financial system that while innovative is slower, isn't quite so manic.
MORAN: … and slows down the amount of debt that it creates?
GEITHNER: I think we'd like to see less drama and we'd like to see fewer, like I would just say, less substantial swings in these booms of credit, booms and busts of credit, and I think that's achievable.
We're going to have periods where growth is strong, where economies are stable, people feel comfortable taking a lot of risk, but you don't want that to go too far and build up the kind of imbalances we saw that helped provoke this crisis.
MORAN: So built-in brakes on booms?
GEITHNER: Yes. I think you want to have a little bit of the capacity for people to step on the brakes a bit as the boom gets going before it goes too far.
MORAN: One of the things in this proposal is more power for the Federal Reserve Board and that is very controversial. There are a lot of people saying that's a dangerous thing to do. The Fed should just be about the money policy and not get involved in regulation. What do you say to that?
GEITHNER: All central banks, including ours, our Federal Reserve, are given responsibility for monetary policy, to keep growth stable over time, inflation low and stable. But alongside that responsibility, in the United States, almost 100 years ago, an in countries round the world, central banks also have this critical responsibility for financial stability.
The question is, and the challenge is to make sure they have the authority to discharge that responsibility well. And we need to give them some tightening up of authority in those areas if they're going to do that job well. And there is no credible alternative to giving the Fed this responsibility. And I think that you're not going to have a system that is more stable in the future without giving them a slightly clearer set of responsibility for maintaining stability and tighter authority to go with that.