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How to prevent America's next financial crisis
Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.
A clear lesson of this crisis is that any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster.
This is a defining moment for financial reform. We have to get it right. We cannot build a system that depends on the wisdom and judgment of future regulators. Even the smartest individuals armed with the sharpest tools will not be able to find every weakness and preempt every crisis. Instead, the best strategy for stability is to force the financial system to operate with clear rules that set unambiguous limits on leverage and risk.
We need that to happen here and around the world. Importantly, with the Senate bill, the United States would have a strong hand in negotiating a global agreement on new capital requirements by the end of the year. Such an agreement would establish a level playing field with minimum requirements for capital, and compliance would be open to scrutiny by regulators and the markets.
The Senate bill is strong. It would create an independent agency to better protect American families across the financial marketplace. It would protect against "too big to fail." And it would bring the derivatives market out of the dark. As the bill moves to the floor, we will fight any attempt to weaken it. The American people have suffered through too much to enact reform that does too little.
The writer is secretary of the Treasury.