WASHINGTON - TREASURY Secretary Timothy Geithner is telling lawmakers the US economy stumbled last year in part because the power and risks of an explosive derivatives market blindsided the government.

In congressional testimony prepared for delivery on Friday, Mr Geithner said the ease with which derivatives were bought and sold in an era of easy credit encouraged financial institutions and investors to take on too much risk.

At the same time, government regulators weren't given the proper tools to mitigate those risks and protect the American consumer, he said.

The federal regulatory system 'failed in its most basic responsibility to produce a stable and resilient system for providing credit and protecting consumers and investors,' he said.

Mr Geithner was testifying before the House of Representatives Financial Services Committee and the House Agriculture Committee, which share jurisdiction of derivatives.

It will be his first appearance in the House since President Barack Obama laid out his plan to overhaul the regulatory framework governing the financial system. Mr Geithner testified before the Senate Banking Committee in June.

Since then, the proposal has run up against much of the financial industry, which says it would raise costs and squash innovation.

Under the plan, which requires Congress' blessing, the Fed would be put in charge of keeping large, influential institutions in check. A new consumer protection agency also would be created.

Additionally, Mr Obama wants to regulate for the first time derivatives that are being privately traded 'over the counter,' or away from an exchange. Derivatives are financial instruments whose value is derived from something else such as a mortgage-backed security or a commodity like oil.

The allure of the over-the-counter derivative, as opposed to those swapped on exchanges, is that it can be individually negotiated and tailored to meet the specific needs of the buyer.

But Mr Geithner said many investors used the instruments to evade regulation, exploit regulatory loopholes or minimise their taxes. -- AP