Vegas
04-01-2008, 02:24 PM
http://www.ibdeditorials.com/IBDArticles.aspx?id=291855232531216
Treasury Secretary Henry Paulson has proposed sweeping new financial reforms that would in many ways be an improvement over the dysfunctional system we now have. But we do have some concerns.
Surveying the wreckage of America's financial industry, Paulson wants to reshape the entire regulatory system and give sweeping new powers to the Federal Reserve.
We're not against new thinking when it comes to financial regulation. Quite frankly, since 1960 there has been at least one major financial crisis each decade that has exposed glaring weaknesses in our postwar financial regulations.
Still, the idea that the government can simply wave a wand and everything will be better is naive. Usually it's government itself that causes the problem — and then blames industry for it. That's certainly true with the subprime crisis.
We've made it no secret that we prefer market-based solutions to market-based problems. That said, looking at the mess surrounding subprime lending and the subsequent housing meltdown, it's hard not to fault the government.
Those old enough remember the Community Redevelopment Act of 1977, which in essence compelled banks with U.S. charters to lend to people who didn't have sterling credit histories. The idea was to help poor, deserving minorities get access to credit and homeownership.
But banks and mortgage lenders started putting marginal credit risks into homes they clearly couldn't afford. Today, according to Goldman Sachs, the unwinding of this problem will cost upward of $460 billion in the U.S., and more than $1 trillion globally.
Banks and others, who now must "mark to market" their damaged asset portfolios, are finding it hard to emerge from the credit crunch. They don't have the capital.
Will Paulson's plan help? It does give banks "optional" regulation, letting them choose whether they're regulated by the state or the federal government. This lets companies pick the best regulator and set up competition between regulators — not a bad thing.
He also wants to make the Federal Reserve a kind of "super-regulator" for the financial industry. Since the Fed is a quasi-governmental entity "owned" by the banks it regulates, it's perhaps better positioned to understand the rest of the industry's ills than another massive federal regulatory agency would be. That said, the past record of Fed mistakes doesn't inspire a lot of confidence.
Paulson says his changes aren't meant to address recent problems. But we note that his proposals come just weeks after the Fed engineered billions in loans for Bear Stearns and others on Wall Street, in effect performing the very role Paulson envisions.
"To do its job as the market stability regulator," Paulson said Monday, selling his new idea, "the Fed would have to be able to evaluate capital liquidity and margin practices across the financial system and their potential impact on overall financial stability."
Maybe so. But we'd warn against creating a situation in which the cure will be worse than the disease. For one, we worry that Treasury's reforms will encourage a wave of new laws by a meddling Congress. This would be a huge, costly mistake.
What concerns us more is a report by Britain's Daily Telegraph that U.S. Fed officials have contacted central bankers in Scandinavia to discuss the nationalization of banks there during the 1991-93 financial crisis. Banks there have never been the same.
We're all for streamlining banking regulations to increase transparency and responsibility.
But we also think that, at the end of the day, the government must operate under a kind of Hippocratic oath: First do no harm. A corollary to that is: Markets must be allowed to work. Any reform that doesn't do that is sure to be a costly failure.
Treasury Secretary Henry Paulson has proposed sweeping new financial reforms that would in many ways be an improvement over the dysfunctional system we now have. But we do have some concerns.
Surveying the wreckage of America's financial industry, Paulson wants to reshape the entire regulatory system and give sweeping new powers to the Federal Reserve.
We're not against new thinking when it comes to financial regulation. Quite frankly, since 1960 there has been at least one major financial crisis each decade that has exposed glaring weaknesses in our postwar financial regulations.
Still, the idea that the government can simply wave a wand and everything will be better is naive. Usually it's government itself that causes the problem — and then blames industry for it. That's certainly true with the subprime crisis.
We've made it no secret that we prefer market-based solutions to market-based problems. That said, looking at the mess surrounding subprime lending and the subsequent housing meltdown, it's hard not to fault the government.
Those old enough remember the Community Redevelopment Act of 1977, which in essence compelled banks with U.S. charters to lend to people who didn't have sterling credit histories. The idea was to help poor, deserving minorities get access to credit and homeownership.
But banks and mortgage lenders started putting marginal credit risks into homes they clearly couldn't afford. Today, according to Goldman Sachs, the unwinding of this problem will cost upward of $460 billion in the U.S., and more than $1 trillion globally.
Banks and others, who now must "mark to market" their damaged asset portfolios, are finding it hard to emerge from the credit crunch. They don't have the capital.
Will Paulson's plan help? It does give banks "optional" regulation, letting them choose whether they're regulated by the state or the federal government. This lets companies pick the best regulator and set up competition between regulators — not a bad thing.
He also wants to make the Federal Reserve a kind of "super-regulator" for the financial industry. Since the Fed is a quasi-governmental entity "owned" by the banks it regulates, it's perhaps better positioned to understand the rest of the industry's ills than another massive federal regulatory agency would be. That said, the past record of Fed mistakes doesn't inspire a lot of confidence.
Paulson says his changes aren't meant to address recent problems. But we note that his proposals come just weeks after the Fed engineered billions in loans for Bear Stearns and others on Wall Street, in effect performing the very role Paulson envisions.
"To do its job as the market stability regulator," Paulson said Monday, selling his new idea, "the Fed would have to be able to evaluate capital liquidity and margin practices across the financial system and their potential impact on overall financial stability."
Maybe so. But we'd warn against creating a situation in which the cure will be worse than the disease. For one, we worry that Treasury's reforms will encourage a wave of new laws by a meddling Congress. This would be a huge, costly mistake.
What concerns us more is a report by Britain's Daily Telegraph that U.S. Fed officials have contacted central bankers in Scandinavia to discuss the nationalization of banks there during the 1991-93 financial crisis. Banks there have never been the same.
We're all for streamlining banking regulations to increase transparency and responsibility.
But we also think that, at the end of the day, the government must operate under a kind of Hippocratic oath: First do no harm. A corollary to that is: Markets must be allowed to work. Any reform that doesn't do that is sure to be a costly failure.