06/08/2010 05:12 am ET | Updated May 25, 2011

White House Responds To Accusation It's Giving Regulators Too Much Authority

A group of senior administration officials pushed back on Wednesday against criticism that the president's plan for regulatory reform continues to give regulators too much judgment and influence, with vital components of reform subject to their individual whims.

In a briefing with reporters, Neal Wolin, Deputy Secretary of the Treasury said that it would not be "realistic" to design a regulatory system that "would somehow work on perfect autopilot without human beings having to engage and make judgments." Instead, he said, the guiding principle of Obama's plan is to set rules and provide tools to buffer the financial system from systemic risk.

"Every part of government requires human beings and human beings applying judgment," said Wolin. "We wouldn't suggest otherwise. What we are saying is that it is important to put in our framework that closes up gaps, that gives regulators the tools they didn't have before, that makes sure they have their authorities and accountabilities well aligned, that minimizes the chance of these kinds of things from happening again, and also gives the government tools and the structures with which to use those tools that do their best to make sure we take care of these things."

The remarks represented a rejoinder of sorts to a growing philosophical critique with the proposals put forth by the president and Senator Chris Dodd (D-Conn.): mainly that the legislative language still grants too much responsibility to the regulators at the Fed and other agencies. Take for instance debt-to-equity ratio requirements for big banks. The bill that passed the House would require institutions to set aside a fixed amount of capital as a way to ensure they're on stable footing. The Senate bill doesn't include mandatory limits on leverage. Instead it establishes an oversight council with "the sole job to identify and respond to emerging risks throughout the financial system."

What happens, the question is asked (by, among others, the New York Times's Paul Krugman) if that council is made up of non-well-intentioned people?

The Huffington Post posed the question to Wolin, Deputy Director of the National Economic Council Diana Farrell, and Michael Barr, Assistant Secretary of the Treasury for Financial Institutions. On the specific point of leverage requirements, the three of them argued that strict ratios would hamper "basic flexibility" in the financial system. On the broader point, they made the case that though the "basic thrust" of their regulatory reform package is to remove the risk of human error, there is only so far one can go without seriously detracting from economic efficiency.

"We have got to have a system that is more rules-based," said Barr. "But we have to understand that the system has to keep up with market practices."

"We have to recognize that for all those measures, the system won't be safe until it is fail-safe, period," added Farrell. "And there will be errors made, at some point hopefully a long, long time from now. Which is why another aspect of this is these resolution authorities to ensure that the tools are there should someone not foresee something or should the right thing not be done. So I think it is a lot of belt and suspenders to anticipate and prevent things from happening -- but a humble-like admission that not all regulators will be perfect at all times, and so really strong tools to deal with that failure and make it less painful to the taxpayer."