WASHINGTON, March 31, 2008 (AFP) - US officials Monday proposed a broad overhaul of financial market regulation in an effort to restore confidence in a system reeling from the subprime mortgage mayhem.

The announcement comes as the US regulatory system is blamed for failing to recognize rampant excesses in mortgage lending until after they set off what is now seen as the worst financial crisis in decades.

'Government has a responsibility to make sure our financial system is regulated effectively. And in this area, we can do a better job,' Treasury Secretary Henry Paulson said in unveiling the plan.

Although the plan was announced amid a crisis of confidence in financial markets, Paulson said it has been in the works for months and is not 'a response to the circumstances of the day,' but aimed at addressing 'complex, long-term issues' to help make markets more efficient and competitive.

Under the proposal described as the most sweeping since the Great Depression, the Federal Reserve would gain oversight of Wall Street securities firms which now have access to the central bank's emergency lending facilities.

The plan also calls for a new federal panel that would oversee state systems for regulating participants in mortgage lending.

It would eliminate the differences between supervision of banks and savings and loan institutions, creating a single entity to regulate both, and merge the Securities and Exchange Commission, which regulates companies with publicly traded shares, with the Commodities Futures Trading Commission, which oversees commodities trading.

The blueprint also sees an 'optional' federal charter for insurance companies that would allow the federal government a role in overseeing another key component of the financial system.

Some observers described the plan as the most ambitious overhaul since president Franklin Roosevelt launched the current regulatory structure after the Wall Street crash and bank failures that were part of the 1930s Great Depression.

'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,' Paulson said.

Yet Paulson said that with few exceptions, the recommendations 'should not and will not be implemented until after the present market difficulties are past,' he said.

The Treasury's most urgent priority is working through the housing downturn and market disruption and it will remain so until the problems are resolved, he added.

President George W. Bush's administration and the central bank are trying to shore up confidence while minimizing the impact of the meltdown in housing stemming from 'subprime' loans made to people with shaky credit which helped inflate a real estate bubble.

The proposal elicited a wide range of reaction from praise to skepticism.

'For those of you who think we are not in a recession, are you convinced now? Forget recession, we have jumped right into depression-like reforms,' said Kevin Giddis, market analyst at Morgan Keegan.

Analysts at Wrightson ICAP said the plan 'would create a more coherent supervisory scheme and would eliminate some of the inconsistencies arising from today's patchwork system.'

More cynically, Princeton economist Paul Krugman said the plan is 'about creating the appearance of responding to the current crisis, without actually doing anything substantive.'

Krugman said the Bush administration 'has spent the last seven years trying to do away with government oversight of the financial industry ... To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology -- and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake.'