WASHINGTON - President Obama's plan to increase oversight of banks and other financial institutions met with skepticism yesterday on Capitol Hill, where senators sharply questioned whether it was enough to prevent another economic meltdown.
The reaction suggests the proposal will be rewritten by a Congress sensitive to voter frustration with the government's handling of the economy.
"They're very angry, and they are worried. And they are wondering who's looking out for them," Sen. Christopher J. Dodd, chairman of the Senate Banking Committee, said of his Connecticut constituents.
In testimony before the panel yesterday, Treasury Secretary Timothy Geithner defended the proposal as the nation's best shot.
"It will be very hard, perhaps impossible, for any authority, any individual to anticipate and preempt all potential sources of future risk," Geithner said.
Lawmakers mostly agreed that change was needed to streamline federal regulation and fill in oversight gaps believed to have contributed to the housing and credit crisis, which began the recession.
Several Democrats also lauded the proposed creation of a consumer-protection agency that would police the market for deceptive business practices in such financial products as credit cards and mortgages.
But members on both sides of the aisle questioned whether the administration was putting too much faith in the Federal Reserve.
Under Obama's plan, the Fed would oversee institutions deemed so big or influential in the market that their failure could seriously damage the overall economy.
A council of federal regulators, including the Fed, would help monitor the market for risk. But the Fed ultimately would be accountable for ensuring that companies do not make overly risky bets.
Several lawmakers have suggested tasking the council of regulators with that job and criticized the Fed for its role in the recent crisis.
"The reality is they [the Fed] had the knowledge and authority to address the mortgage problem long before it became a crisis, and they didn't act," said Sen. Robert Menendez (D., N.J.).
Other lawmakers questioned whether the Fed could become an effective superregulator while retaining its role as the nation's central bank and setting monetary policy.
"I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles," said Sen. Richard Shelby of Alabama, the top Republican on the Senate panel.
Geithner said the Fed was the best option because it was the only institution with the capacity and expertise to monitor the "too big to fail" firms. Giving the power to the council of regulators could delay action in a crisis, he added.
"You cannot convene a committee to put out a fire," he said.