WASHINGTON — Treasury Secretary Henry M. Paulson Jr.'s blueprint for regulatory reform, officially unveiled Monday, sets the stage for a confrontation with Congress by offering no relief for troubled homeowners and in many instances advocating less, not more, federal supervision of the nation's financial system.
Paulson proposed the broadest restructuring of federal regulatory institutions in 75 years with a call to merge agencies and redraw lines of authority that in some cases go back to the Great Depression. But the plan would put off for years any attempt to create new regulations for the streamlined system to enforce.
As a result, even if the new structure were eventually adopted, it would do little to prevent a repeat of the current crisis or something similar, the Treasury secretary acknowledged.
The limits of the administration's approach drew immediate criticism from Democrats as well as some analysts.
"In a different time, the administration's proposal would be a welcome start to a needed debate about modernizing the financial services regulatory system," said Ellen Seidman of the New America Foundation, a centrist think tank in Washington. "But this proposal does not deal with the root causes of our current crisis."
Paulson said that upheavals have become a regular, if unfortunate, part of the financial system's operation.
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," the Treasury chief said Monday while unveiling the 218-page plan.
House Speaker Nancy Pelosi (D-San Francisco) called Paulson's plan a "step in the right direction" but said, "We need to go further."
"We must take steps now to provide help to families who are hurting" because of mortgage foreclosures and job losses, she said in a statement.
Paulson's proposal reflects both the Bush administration's aversion to government intervention in the economy and his own experience on Wall Street.
"He's taking advantage of the current crisis to push a regulatory restructuring plan that would otherwise attract no interest," said Robert Litan, a senior fellow at the nonpartisan Brookings Institution in Washington.
Paulson, the former chairman and chief executive of investment giant Goldman Sachs Group Inc., described Washington's regulatory apparatus as utterly outmoded and outflanked by market innovations such as sub-prime mortgages and mortgage-backed securities.
He said that financial innovation was racing ahead at such a feverish pace, the best the federal government could hope to do was define the broad outlines of a system that could be altered as new financial products, opportunities and threats emerged.
"We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change," he said.
Much of the nation's regulatory apparatus is now focused on making certain that traditional banks are run safely and soundly.
But bankers have watched their importance diminish in recent decades as financial players such as mortgage brokers, hedge funds, consumer finance companies and others have taken on bigger roles.
The current crisis started last summer, when many sub-prime borrowers -- those with flawed credit histories -- began failing to make their monthly mortgage payments, raising doubts about the value of their mortgages and setting off a rash of foreclosures. Similar doubts then cascaded throughout the financial system.
In his speech, Paulson singled out sub-prime mortgages as an example of an innovation that had benefited society. Among other things, he said, they provided people who had previously been denied credit plentiful financing to buy homes.
But the new loans were outside the normal purview of Washington's bank regulators, so the mortgages went almost entirely unregulated until they had seeped into nearly every corner of the financial system in the form of mortgage-backed securities.
Paulson's proposal envisions creating a mortgage origination commission that would include federal bank regulators and state officials. The commission would propose licensing requirements for mortgage brokers and a method for revoking those licenses in cases of bad behavior.
But the commission's only clout would be the threat of giving states that do not adopt the regulations a bad grade on a regularly issued report card.
"It was regulators' mindless belief that the market is always right that made them deaf to warnings that the sub-prime market was trouble," said Barbara Roper, investor protection director for the Consumer Federation of America. "Until you change that attitude and the reluctance to regulate, consumers and investors aren't going to see any benefit."
The administration faces a number of larger problems in pushing its plan.