The Federal Reserve may soon become much more powerful if Treasury Secretary Henry Paulson has his way. Earlier today, he released the “Blueprint for a Modernized Financial Regulatory Structure,” which includes a number of recommendations designed to take power away from the U.S. Securities and Exchange Commission.
Paulson’s recommendations
The Federal Reserve should be able to increase liquidity by lending directly to “non-depository institutions” (such as investment banks), and to facilitate this, the Fed will have access to information at the investment banks. The government would have the power to perform on-site inspections if they so desire in an effort to quickly lend to the businesses if necessary.
Paulson wants the Federal Reserve to create a Mortgage Origination Commission to oversee and rate how states license and regulate lenders and create minimum qualification standards for licensing.
The Treasury Secretary believes the Federal Reserve should regulate state-chartered banks, payment systems, and insurance companies. The SEC would merge with the U.S. Commodities Futures Trading Commission to oversee traditional investments as well as some of the more complicated structures.
With these suggestions implemented, the government will regulate “business conduct” ensuring consumer protection, including rules for writing term disclosures across the board of financial products.
Reactions
Nomi Prins points out that the Federal Reserve has spectacularly failed recently with its attempts to stimulate and regulate, so providing more power to the agency is a step in the wrong direction.
All of the plan’s suggestions are cosmetic. Instead, let’s please have a serious discussion about the nature of the banking system structure itself: its complexity, its responsibility, and the proper role of the federal government in regulating it. The United States has had such a debate before, leading up to the landmark 1933 Glass Steagall Act. We can and should have such a sweeping debate again.
Traditional small-government Republicans would most likely agree with Nomi. The Democrats are critical of the plan as well, saying the proposal doesn’t go far enough to provide direct help to consumers and to hold investment banks as accountable as depository banks.
I agree that regulation should be consolidated for all financial firms and the same standards for reserve holdings should apply to any institution that has access to direct lending from the Federal Reserve. What do you think?
Image from Wikipedia
Treasury Releases Blueprint for Stronger Regulatory Structure [U.S. Department of the Treasury]
Subscribe
Great article. Anytime the government gets involved in anything it almost always turns out to be a disaster.
I don’t feel sorry for anyone who has lost their home and I don’t think anyone has been taken advantage of in terms of predatory lending practices.
The banks told these people that their ARM (Adjustable Rate.. hmm) loan would at some point go up. At what point did this people not listen to this fact?
It’s the market, people didn’t do their homework, didn’t plan for the change in rate, and are now losing their homes. The great thing about the United States is there are people out there, like me, that are taking this so called “mortgage crisis” opportunity and buying up homes at an inexpensive rate.. and I’m doing it with FIXED rates.
Does anyone really remember taking a class in high school called “Common Sense 101”? Didn’t think so.. it’s learned people and a LOT of people just learned 1 of 101 lessons. No government intervention, unless they are providing Common Sense 101 classes.
It’s a trick…
The Fed is desperately creating distraction after distraction as they try to glue the financial system back together before the house of cards collapses.
The plan will be debated in congress for years before anything changes. The true is that the public has been taken advantage of – and their lack of financial education has been exposed by the mortgage crisis. The government can not longer let people make mortgage decisions while putting the financial markets at risk. The coming regulations will have to be very heavy in order to be sure a home owner knows what they are doing. One of the new requirements should be to take a community education class on budgeting or mortgage before buying a house.
Joshua is right on the money – this is a good time for the smart people to buy up cheap assets.