Updated from 12:44 p.m. EDT

The Bush Administration unveiled a sweeping plan to overhaul the regulation of U.S. financial markets on Monday that would give the

Federal Reserve

broad, new powers to oversee market stability.

The proposals amount to the first salvo in what is expected to be a long and contentious debate over the government's role in financial markets in light of the U.S. housing and credit crisis. Shaky credit tied to mortgages has sent financial markets into turmoil by leading to large asset writedowns at banks and dried up liquidity, all of which led to the swift demise of a major investment bank,

Bear Stearns

( BSC).

Initial criticisms of the plan will likely focus on the Fed's perceived failure to use its existing regulatory powers to dampen the housing bubble, as well as the Bush Administration's longstanding contention that financial markets are over-regulated, sending investors to friendlier markets overseas. Moreover, the proposals come at a time when the crisis is already raging, and Democrats are calling on the federal government to focus directly on consumers that are being hurt by its fallout.

Cramer: Paulson Plan Is Hooey

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Fueling those critics, Treasury Secretary Hank Paulson's speech that laid out the administration's proposals coincided with the

resignation of Housing and Urban Development Secretary Alphonso Jackson

. At the center of the mortgage storm that's plaguing financial markets, Jackson has been accused of steering lucrative housing contracts in the Virgin Islands and New Orleans to friends -- charges that he has denied.

Two senior Democratic senators have called on Jackson to resign, but he explained his departure as an effort to spend more time with his family.

In this environment, Paulson acknowledged that the administration's regulatory proposals for the financial system are part of a long-term effort that will extend beyond the presidency of George W. Bush, which ends at the beginning of 2009.

"Once we are through this period of market stress, we need to begin the serious work of modernizing and reforming the structure, which will require a great deal of discussion and many years to complete," said Paulson.

Former Fed governor Lyle Gramley, now a senior economic advisor with the Stanford Financial Group, says the administration's plan has merit, but it's unlikely to be embraced amid the intense partisanship that has paralyzed Washington, D.C. in recent years amid spiraling budget deficits and controversial wars continuing in the Middle East.

"It's going to involve a lot of turf battles, so it's going to be very difficult to get through Congress," says Gramley. "That said, there is widespread recognition that we've leaned too heavily on market discipline and it has really let us down. We've got to try to get involved with more regulation of financial institutions like investment banks, hedge funds and private equity firms. There will be a great deal of sympathy for creating a market stability regulator, and the notion that that should go into the Federal Reserve is the correct one."

The Fed inspired a chorus of demands for a new regulatory framework earlier this month when it

abandoned its traditional role

as a lender of last resort for depository institutions, like commercial banks, and

rushed to the aid

of Bear Stearns as it faced a bankruptcy that could have trigged a systemic breakdown in the financial system. The Fed's backstopping of nearly $30 billion in shaky mortgage-related debt to prop up the fire sale to

JPMorgan Chase

(JPM) - Get Report

marked the most dramatic encroachment into financial markets by the central bank since the Great Depression.

Paulson acknowledged as much in his comments, saying the Fed should "have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

In addition to the expansion of the Fed's role, the Treasury proposal would revamp the nation's plethora of financial regulators, merging some agencies into others. For example, a "Prudential Financial Regulator," would oversee banks, which are currently regulated by five federal agencies. This new office would be allowed to send officials into any depository institution that is protected by federal guarantees such as deposit insurance, and it would eliminate the distinction between banks and thrift institutions.

Another overseer would merge the responsibilities of the

TheStreet Recommends

Securities and Exchange Commission

, which oversees the stock and bond markets, and the Commodity Futures Trading Commission, which regulates trading in futures contracts for commodities and currencies.

However, the plan would actually further limit the SEC's existing powers, by allowing stock exchanges to regulate themselves more and by making it easier for them to approve new products, the report said. Such goals are part of Treasury Secretary Henry Paulson's past efforts to reduce regulation on U.S. markets that he contends make them less competitive with overseas bourses, the report added.

Treasury is also proposing to create for the first time a national insurance regulator, which would take over the duties currently performed individually by the states, the report said. This would eliminate the patchwork of regulations by 50 different authorities, but it is likely to be met with a backlash from the states' insurance regulators.

In the short run, Paulson also proposed creating a new Mortgage Origination Commission, with a director appointed by the president.

"The MOC would evaluate, rate and report on each state's adequacy for licensing and regulation of participants in the mortgage origination process," Paulson said.

As for the expansion of the Fed's role, Gramley says the administration needs to give the central bank more explicit powers to enforce its role as market stabilizer. He says the Fed should have the ability to set capital requirements and have continuous access to the financials of institutions that are likely to be a source of systemic risks, and it should have the power to issue "cease and desist" orders.

"In periods where we experience financial crisis that threatens systemic risk, the Fed is the one that has to come to the rescue, so the Fed needs to have concrete powers to do the job," says Gramley.

Know What You Own

: BSC operates in the financial services industry, and some of the other stocks in its field include

Citigroup

(C) - Get Report

,

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

Merrill Lynch

( MER),

Bank of America

(BAC) - Get Report

and

Lehman Brothers

( LEH). These stocks were recently trading at ($21.34, +2.45%), ($166.06, +0.98%), ($46.45, +3.82%), ($40.91, +2.43%), ($38.46, +1.02%) and ($38.97, +2.93%) respectively. For more on the value of knowing what you own, visit TheStreet.com's

Investing A-to-Z

section.