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?

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Treasury Releases Blueprint for Stronger Regulatory Structure [U.S. Department of the Treasury]

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