The administration that does not believe in regulating business is trying to reinvent how finance is regulated.

Treasury Secretary Hank Paulson has outlined a 218-page proposal to overhaul the regulation of financial institutions. Details of the plan emerged late Friday and center on giving the Federal Reserve new powers as a "market-stability regulator."

Introducing the proposal, Paulson said:

"Our current regulatory structure was not built to address the modern financial system with its diversity of market participants, innovation, complexity of financial instruments, convergence of financial intermediaries and trading platforms, global integration and interconnectedness among financial institutions, investors and markets. Moreover, our major financial services companies are becoming larger, more complex, and more difficult to manage. Much of our current regulatory system was developed after the Great Depression, and it has developed through reaction—a pattern of creating regulators as a response to market innovations or to market stress."

Under the proposal, the Commodity Futures Trading Commission would be merged into the Securities and Exchange Commission, although the S.E.C. would adopt some of the C.F.T.C.'s "principles-based" approach to regulating. In addition, the elimination of a separate charter for savings institutions would be abolished, as well as its regulator, the Office of Thrift Supervision.

The proposal also calls for a federal commission that while leaving the regulation of mortgage brokers to the states, would create minimal licensing standards and review the states' efforts.

The proposal's new model would have three regulators:

"Our work led us to recommend a regulatory model based on objectives, to more closely link the regulatory structure to the reasons why we regulate. This model would have three regulators: a regulator focused solely on market stability across the entire financial sector; a regulator focused on safety and soundness of those institutions supported by a federal guarantee; and a regulator focused on protecting consumers and investors. A major advantage of this structure is its timelessness and its flexibility. It can more easily respond and adapt to the ever-changing marketplace because it is organized by regulatory objective rather than by financial institution category."
 
The plan is a conceptual leap for Washington, uprooting the previous petty wars over turf that have been the mark of most financial regulatory battles. The approach is fitting coming from someone who was chief executive of Goldman Sachs—bold, yet ultimately light on the regulatory hand.

The Securities Industry and Financial Markets Association said that the "Treasury has delivered a thoughtful and sweeping plan which should provoke intense discussion, debate, and potential legislative changes."  

But Jay Baris, a financial services partner at the law firm Kramer Levin Naftalis & Frankel, noted: "The Treasury Department seeks to balance the goals of stabilizing our financial markets while encouraging innovation. These may be hopelessly incompatible."

And it is unclear who will support this proposal. It is too broad to find fans on Wall Street, and it is not deep or aggressive enough to win over Democrats in Congress—or indeed anyone appalled by the hands-off approach that the Bush administration has taken in the crisis until this point.

As Nelson Schwartz and Floyd Norris of the New York Times put it in an analysis on Sunday: "The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis."

Paulson's proposal is an opening salvo in a debate that will probably go on for some years. With the number of home foreclosures rising and the markets still nervous despite the rescue of Bear Stearns, the question is whether this is a debate that should be a priority for the administration.

"It's probably a bad idea to spend too much time debating the organization of the fire department while the fire is still burning," Larry Summers, the former Clinton administration Treasury Secretary, told the Wall Street Journal.