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.
