Paulson Releases Plan for Regulatory Overhaul
Proposals would widen Fed's scope and eliminate the SEC.
March 31, 2008
Treasury Secretary Henry Paulson Jr. unveiled an ambitious new plan to regulate the US financial markets this morning.
Until now, the Federal Reserve has played a mostly passive role with regard to policing financial institutions, leaving the SEC largely responsible for monitoring securities.
Alan Greenspan, former chairman of the Fed, in a recent Financial Times column, argued that attempts to prevent future financial ruin through a new set of regulatory changes will prove unwieldy, and that “we will never have a perfect model of risk.” The short version is that until now, the Fed has been more involved with cleaning up the mess after financial disasters strike than it has been with preventing future crises. Meanwhile, many have since argued that this hands-off policy was the main culprit for the recent failure of the financial institutions.
If Paulson’s plan is accepted as proposed -- which, given the initial reactions to the plan, already does not look likely -- all this could change drastically. The proposed changes to the current system would mean a more direct involvement in overseeing and monitoring financial development by the Fed, and could include the end of the SEC, which until now has monitored securities. According to the proposed plan, the SEC would be merged with the Commodity Futures Trading Commission.
The plan would create a Mortgage Origination Commission, which would be run be a director appointed by the President.
In addition, the Office of Thrift Supervision and state insurance regulators would each be eliminated.
These changes, will take a considerable amount of time to be enacted, and the proposal, as has been emphasized by Paulson, has been under construction for over a year, and should not be read as an immediate fix to the current financial disaster.
In an interview with the Wall Street Journal, Paulson said, “We need regulation, but if we have it, it should be just structured in a way that it has some way of being more effective. Everywhere I look, I see the plumbing hasn't changed to meet the realities."
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