BusinessWeek chief economist Mike Mandel argues that Secretary Paulson’s plan only works in a fictional world where investment banks properly regulate themselves.
Let’s see. In the middle of perhaps the greatest financial upheaval since the Great Depression, Treasury Secretary Hank Paulson is proposing a change in financial regulations which basically amounts to a big wink to Wall Street. His plan will go nowhere, both for political and practical reasons. In fact, it does not even meet the minimum standard of improving transparency, which would reduce the possibility of a similar crisis in the future.
The main point of the Paulson plan is to make regulation more efficient. It notes that changes in the capital markets are:
“… pressuring the US regulatory structure, exposing regulatory gaps as well as redundancies, and compelling market participants to do business in other jurisdictions with more efficient regulation.”
So what does the plan actually propose?
US proposes broad reform of market oversight
WASHINGTON (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.
US plans finance system overhaul
31 March 2008 16:38 UK
The US Treasury has revealed its blueprint for the biggest overhaul of regulation of the financial sector since the 1930s.
Critics have said that the credit crunch and resultant market turmoil made a strong case for change.
But Treasury Secretary Henry Paulson rejected claims that existing regulations have led to the turmoil.
And he said the plan should not be implemented until current difficulties roiling financial markets are resolved.
The plan would beef up the powers of the Federal Reserve, which earlier this month engineered the purchase of troubled investment bank Bear Stearns by JP Morgan.
It would give it greater oversight of all kinds of financial institutions from hedge funds to insurance companies.
US announces financial overhaul
MONDAY, MARCH 31, 2008
18:23 MECCA TIME, 15:23 GMT
The US government has proposed a comprehensive overhaul of the financial regulatory system, giving the Federal Reserve greater oversight over Wall Street.
The plan, described as the most sweeping change to the US financial system since the 1930’s, would also create new bodies to supervise banks, businesses, consumer protection and mortgages.
The plan will give the Federal Reserve, the US central bank, more power to protect the stability of the entire financial system while merging day-to-day bank supervision into one agency, down from five at present.
It also would create one large agency in charge of business conduct and consumer protection, performing many of the functions of the current Securities and Exchange Commission.
The plan also asks Congress to establish a federal Mortgage Origination Commission to set recommended federal standards for mortgage brokers.
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