Summers Says Financial System That Causes One Crisis Every Three Years Demands Reforms

By Lindsey Ellerson

Oct 16, 2009 12:00pm

ABC News' Matthew Jaffe reports: Continuing the Obama administration's push for financial regulatory reforms, the president's top economic adviser today will say that any system that causes a crisis every three years – as the financial system has done for the past generation – must be revamped. "There is much in the way the financial system functions in America and around the world that is essential to preserve and yet the events of the last two years are the culmination of a remarkable sequence of financial problems," National Economic Council Director Larry Summers says in prepared remarks for the Economist's Buttonwood Gathering in New York City this afternoon. "Roughly every three years for the last generation a financial system that was intended to manage, distribute, and control risk has in fact been a source of risk, with devastating consequences for workers, consumers, and taxpayers." As evidence, Summers cites the Latin American debt crisis, the 1987 stock market crash, the savings and loan meltdown, the Mexican financial crisis, the Asian crisis, the collapse of Long Term Capital Management, the burst of the dotcom bubble, and the current financial crisis. "Surely a system that produces this many accidents and accidents this severe is a system that is very much in need of reform," he says. Over a year after the implementation of the $700 billion financial bailout and other government rescue measures, Summers says that "there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system." "The time has come for fundamental change in the financial sector of our economy," he says, "both in how financial institutions conduct their business and how they are regulated." However, the financial industry has vigorously opposed a key element of the administration's proposed financial regulatory reform measures: the creation of the Consumer Financial Protection Agency. On the same day that the President speaks at a public service forum in Texas, Summers tells the financial industry to do their duty for the country and accept new regulations. The NEC chief admonishes the industry, saying, "Financial institutions that have benefited from government support can, should, and must use this moment to think about what they can do for their country, by accepting the necessary regulation to protect the American people." "The events of the past two years," he says, "should serve as a wakeup call for the financial industry." On Thursday the House Financial Services committee took a noteworthy step towards reform, passing a measure that would subject previously unregulated derivatives to new regulation, a move Summers praises and one, he hopes, will help break the recent pattern of a crisis once every three years. "It is our duty – for the government, the financial sector, and everyone else in this debate – to break this cycle and build a new, stronger, and more inclusive foundation for the American economy." – Matthew Jaffe

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