Reuters yesterday reported that the Obama administration “plans to unveil on June 17 its sweeping plan to overhaul financial regulation.” The plan will reportedly “serve as a framework for lawmakers as they embark on the thorny task of restructuring how banks, hedge funds, derivatives, and other financial firms and securities are policed.”

Not to be outdone, House Republicans are putting together their own proposal, to be released next week. Congressional Quarterly reports:

The GOP plan, which is still being finalized, would modify the bankruptcy code to deal with the failure of large financial institutions, reduce the Federal Reserve’s role in banking matters and begin the process of fully privatizing mortgage giants Fannie Mae and Freddie Mac. In those areas, it veers sharply from a regulatory overhaul being finalized by the Obama administration that will serve as a template for congressional Democrats as they turn to crafting legislation on the issue.

Most of this goes right along with the Republican’s misguided attempts to place blame for the financial crisis on Fannie and Freddie, but I was struck that derivatives aren’t mentioned anywhere in the write-up. Could the plan that Republicans are drawing up really not touch on derivatives, which undeniably played a huge role in the economic crisis?

Just today, CongressDaily reported that those favoring stronger regulation “have gained the upper hand in the debate” over derivatives, “placing banks and securities dealers on the defensive in their quest to have Congress apply a light touch to the multitrillion-dollar industry.” Also, the chairman of the Commodity Futures Trading Commission told the Senate Agriculture Committee today that “all derivatives should be regulated in some manner.”

And then there was Sen. Saxby Chambliss (R-GA), who warned the same committee “against ‘vast, unintended consequences’ from overly stringent regulation of derivatives that he said could stifle the flow of cash through the market.” This epitomizes the conservative approach before the economic crisis, and it seems like not much is going to change.

According to a report today in The Hill, Democrats in the House are “biting their nails” and “blanching at the idea that the House could take up a gas tax”:

Democratic leaders have tried to assure them that the proposals of House Transportation and Infrastructure Committee Chairman Jim Oberstar (D-Minn.) won’t be coming to the floor. But Democratic members from conservative districts are watching warily….The budget Congress passed earlier this year included $324 billion for transportation, but Oberstar will soon roll out a transportation bill that could require revenue beyond what the 18.4-cent gas tax can provide.

While the political implications of raising the gas tax are probably very real for the Democrats expressing concern, we found out this week that the Highway Trust Fund (which is funded by the gas tax) is about to go broke for the second consecutive year. If the Fund were to flop, that would mean scaling back or canceling infrastructure projects. It’s not often that I find myself agreeing with Sen. James Inhofe (R-OK), but he had it right in saying that canceling projects “would have a detrimental effect on the economy and will negate any gains made by the stimulus.”

Matthew Yglesias, Ryan Avent, and the Christian Science Monitor’s editorial board have all made compelling cases for raising the gas tax now. As Avent put it, “given the various externalities associated with driving and burning gas, it should be clear that reduced driving and gas consumption are good things, to be encouraged. Given the economic damage sustained by high oil prices last year, it again seems clear that reduced gas consumption is a good thing.”

But the Monitor points out that “eventually government –- both federal and state –- will need to find other revenues from transport users.” Indeed, with new CAFE standards and a greater emphasis on fuel efficient vehicles (hopefully) coming down the turnpike, it makes no sense to think that we can rely on the gas tax as a steady source of revenue indefinitely.

Whether it’s through congestion pricing, changing toll structures “so that different classes of vehicles would pay their respective costs,” or a vehicle miles traveled (VMT) tax, a new revenue stream needs to be found. Whatever the ultimate decision, Oberstar spokesman Jim Berard had it right in saying that a failure to find a new source of revenue “simply kicks the problem down the road.”

Earlier this week, Treasury Secretary Tim Geithner said that allowing some of the nation’s biggest banks to repay their TARP money may render the plan for removing the banks’ toxic assets (the Public-Private Investment Program or PPIP) effectively dead. “As confidence has improved a little bit, we may see less interest — both on the selling side and the buying side,” Geithner said.

And like clockwork, we have Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair postponing her agency’s half of the PPIP due to a lack of interest from the banks:

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets…Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

Policy toward the banks — from altering mark to market accounting to ensuring that they would all pass their stress tests — has seemingly been aimed at allowing them to pretend that their balance sheets are in good shape, instead of actually making them get their balance sheets into good shape. And as Yves Smith pointed out, “as long as they can preserve the fantasy marks for the nuclear waste, they have no compelling reason to clear up the bad assets.”

James Kwak posited that the banks’ “current strategy is to wait out the recession and hope the prices of their legacy loans recover.” This sounds absolutely right, and maybe the loans will gain in value, eventually. But some of these banks (looking at you, Citi!) have a very toxic portfolio, and it’s unclear how they think they’ll ever be healthy again without offloading some bad loans.

As the New York Times noted, “some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning“:

“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

The other half of the PPIP, aimed at toxic securities, seems to still be moving forward. But will there be any more interest in that? And if not, what does it mean for the future of our banking system?