Monday, March 31, 2008

Hyping Paulson's big regulatory reform reshuffle

Will Treasury Secretary Paulson's newly announced changes quell the unrest in the financial markets? Yes, if the plan's success can be measured by the hype it triggered in the media.
March 31 (Bloomberg) -- Treasury Secretary Henry Paulson proposed the broadest overhaul of U.S. financial regulation since the Great Depression, saying the system for overseeing American capitalism needs to be better prepared for "inevitable market disruptions."

"Our major financial services companies are becoming larger, more complex and more difficult to manage," Paulson said in remarks at the Treasury in Washington. "The real threat to market stability is below ground, at the root level where the health of financial firms is intertwined."
Paul Krugman is unconvinced. He thinks Paulson is tinkering with the parts of the system that aren't broken but not addressing the real problems at all.
Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury secretary, declares, “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.”
Biggest regulatory overhaul since the Great Depression, or one more Bush administration shell game? Stay tuned.

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